Lockhart Capital Management Market Update – 27 March 2020

This week kicked off with the market weathering its largest sell-off so far, from retail investors, after the worst ever 5-week run for global equity markets. However, during this period there had already been some mild signs of internal stabilisation within the financial markets and with equities registering significantly oversold positions.  Subsequently we have just witnessed the best three-day period for shares (Dow Jones is up 21% over three trading sessions) since 1931, fuelled by the Federal Reserve announcing “unlimited” QE. This highlights, once again, the dangers of market timing, and of trading in a volatile environment.


It is however far from uncommon to see “bear market rallies” in the order of 15-25% and in 1929, 1987 and 2008 such rallies rolled over and preceded new lows.  The record one day gain in the Dow Jones this week was a welcome change, but outsized daily gains do generally see the market lower, one month later, or at least 70% of the time they do.


Nevertheless, the “dash for cash” has calmed down, which was important, and this has allowed some areas such as gold (biggest weekly advance since 2008) and gold miners that had got caught up in this, to quickly recover.


We mentioned last week that the US Federal Reserve must be allowed to buy corporate and municipal bonds, and that Congress should hurry up and pass an economic recovery bill.  Thankfully the former is now ticked off, and the latter (the “CARES” Act) has been passed, unanimously, and twice the size originally slated, by the Senate and only needs the House of Representatives to do likewise.  The painful amount of time this has taken is however no advert for US politicians.


So, the markets have been pleased with the (eventual) progress from policymakers, and which is now of sufficient scale (on the economic front).  The final box from our list that still needs to be ticked off, is of course the requirement for large scale testing for the virus, so that the problem can be at least somewhat quantified.  Even better, a vaccine (or some such).  In the meantime, and despite the aforementioned positives, sentiment will be vulnerable to corporate profit warnings, and, as we suggested last week, bad news on unemployment.


This has been the most volatile period in stock market history, and much of the amplitude is due to the changed “microstructure” of markets, to which we often refer.  Volatility does tend to cluster, and so we can’t be surprised if there is more to come.  Nevertheless, there has been an improvement in sentiment, partially as most of the forced and panicked sellers have washed through, for now.  Furthermore, traders knew that quarter-end portfolio rebalancing (from pension schemes) was going to lead to the largest ever inflow to equity markets from this source, in the days leading up to the end of March.


One of the key moments to improved (or at least less quickly deteriorating) sentiment, came when Governor Cuomo said that the social distancing programme in New York seems to be working.  New York has pretty much been the heart of the outbreak in the US, and where risk is perhaps greatest.  The rate of hospitalisations is doubling every 5 days there, but over the weekend this was every two days, so on a marginal rate of change basis – and this is how markets work – this was an improvement.


The Coronavirus Aid, Relief and Economic Security (CARES) Act is going to cost the US over $2trn.  This is almost 10% of GDP, and the “bridging” element to it means that essentially the US economy needs to be back up and running (to some degree) by the start of May.  This would allow for the opportunity of a strong economic rebound in the second half of the year and is why former Fed Chairman Ben Bernanke does not think there will be a Depression.  There is not a lot of wiggle room in that time frame though and it seems possible rather than probable.  If it slips much, then it will be a whole different story.


Our expectation would be that the market lows of earlier this week will be tested again, even if not broken.  This would be the normal course of events, but then the Christmas Eve 2018 low was never re-tested (until now) and was a v-shaped bottom.  The normal rules seem to be out of the window at the moment – the transition to a bear market usually takes 10 months or so, but this year it happened in…16 trading sessions.  Still, the point is that every bottom starts with a bounce, but not every bounce is a bottom, if that makes sense.


The Eurozone is, not surprisingly, struggling to produce an entirely united front.  Christine Lagarde has floated the idea of the issuance of “Coronabonds”, for which EZ countries are jointly liable, and would be a step towards fiscal union.  The G20, which came together to successfully deal with the 2008 crisis is aiming to repeat that trick and says it “is united” and that “we will continue to conduct bold and large-scale fiscal support”.


From our point of view, we think “QE”, and the wider $5trn global splurge, stands a good chance of being more “successful” this time around, and by that we mean in creating generalised inflation (rather than just asset price inflation).  Banks are now being encouraged to expand their balance sheets, rather than being told to focus on their capital ratios.  The implications of this are not necessarily great for core assets, although some have re-priced to reflect this already, it would seem.


The beneficiaries should be “Real Assets” (various), and we think that inflation hedges today are still cheap.  As most clients know, our long term strategy is anyway to build out this part of the Lockhart portfolios, with the one change now being that perhaps we will look to do this more quickly and in more size, while still respecting the dangers of trading in this environment.


A small initial step that we are taking this week is to top up our Infrastructure holdings, within the Real Assets sub strategy which will be funded from some of our Alternative assets which has held up very well over the last few weeks.  Infrastructure investments (such as Renewable Energy, Transport & Logistics and Communications) have got caught up in recent broader selling, and unfairly so, we think.  This is not necessarily an unusual or unexpected event, but it does give us the chance to act opportunistically and build some value into the portfolios for the longer term.  Infrastructure was one of our original themes and seems likely to be a huge beneficiary of the fiscal largesse going forward, indeed as confirmed by the Chancellor in his first budget.


These are nerve-wracking times for investors, and especially for those who sit too close to the TV.  We remember Sky News unhelpfully running a FTSE ticker – continually – during 2008/9, which probably encouraged some to take a shorter-term view of their investments than they otherwise might.


The diversification and generally reduced levels of risk which the Lockhart portfolios have been exposed to have helped limit downside losses across the board although there will currently be losses year to date of between 7% to 14% depending on risk profile chosen. This however is in context to the fall in the FTSE All Share Index and average UK equity fund of some 23% and 29% respectively. We will write again at the end of next week, however in the interim please all keep safe.



Andrew Wilson, Chief Investment Officer, 27 March 2020

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