Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
The level of stock markets at any one time represents the sum of all the competing sentiments of investors who buy and sell shares.
Investors weigh the upside risks and the downside risks and markets find a level which reflects a consensus of opinion. As answers to uncertainties emerge, markets move to represent the new reality. Right now is no different, but it’s fair to say that the uncertainties being factored in are rather simpler than normal.
They boil down to a single question - will Covid-19 go away, or not?
Share prices are still depressed from their level going into the crisis, but expectations of recovery in the rest of the year are applying upwards pressure. If current market levels could tell a story it would be something like this: ‘The hit from the pandemic is bad but the recovery has begun, and growth will recover from here as our ability to cope improves and infection levels fall’.
With sentiment now dictated by this one issue, the market is left liable to big moves in either direction as the facts as we know them change.
Dealing with the bad news first, anyone watching infection levels in the US right now knows that the first wave of the virus is not yet done with, let alone a second. States which previously encouraged the public to get back to normal are having to consider extensions of lockdown restrictions. A risk remains that the US is still only in the foothills of its fight against Covid-19 with autumnal weather on the way which could increase its spread.
If the trend continues markets will have to reassess its optimism.
But there is another unknown which could spark a big reaction in the opposite direction. The development of a vaccine is, as we have been told many times, highly uncertain. Yet it is hard not to be encouraged by the rapid progress being made by scientists and medical industries - the market is clearly hopeful that a vaccine and/or an effective therapeutic can be found.
Were the news on a vaccine to suddenly improve we should expect an upward burst in prices. The news today that China is expanding the trial of one of its potential vaccines to military personnel is perhaps providing a counterbalance to all that gloomy news on American lockdowns.
The binary nature of the potential outcomes before us raises the stakes for investors. Tempting as it may be to retreat to cash to avoid another potential leg-down for prices, the prospect of a vaccine or effective treatment means there could in fact be considerable upside to be had from here. These two outcomes for the virus are ‘known unknowns’, as it were, which could be resolved one way or the other over the course of the next few months so investors are taking decisions now which could quickly be shown to be wrong.
Investing is never a completely comfortable rise but now seems particularly uncomfortable. The recovery in share prices this year has underlined that investing through periods of market stress tends to prove more effective than attempting to time a wholesale exit and re-entry into the market. But if you are investing now - ensure you are comfortable with the risk laid before you.
Keep your investments diversified by region, asset class and sector so that the movements you see in your portfolio are more modest than the wilder movements in headlines indices.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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