With European equities falling by almost 3% on the first day of trading in May 2020, it looked like the pandemic induced sell-off in global stock markets was poised to continue as we entered the second quarter of the year. The recovery in markets witnessed since the middle of March was called into question as Donald Trump predicted the severe impact the virus could have on the world’s largest economy with a forecast of as many as 204,000 deaths, suggesting the financial fallout from the pandemic could be as acute as witnessed in other hotspots such as Italy, Spain and the UK. But the sell-off wasn’t to last, particularly when several nations reported a declining trend in the numbers of reported new cases as well as fatalities, and countries such as Denmark and Austria even started easing the previously imposed restrictions. Unfortunately, neither macro nor micro economic data provided any immediate fundamental evidence for the resurgence in stocks. If anything, the situation became less clear as numerous companies either profit warned, withdraw guidance or withdrew dividend, and in many cases all three. In more straightforward times actions such as withdrawing dividends and earnings guidance would likely have been met with severe share price declines but as the practice became viewed as precautionary and common place the impact was often mild or even positive where interpreted as strategically sound.
Despite the lack of company guidance there is still no doubt that 2020 will be a year where company earnings will fall dramatically, however, should the pandemic not worsen, the second quarter may prove to be the trough provided that central bank action is sufficient to help economies rebound strongly when restrictions start to be lifted. Unfortunately, the European authorities have so far not been on the front foot as far as this is concerned and their pronouncements over the period were met with a lukewarm response.
Although good news remains sporadic, and economic growth will get considerably worse before any hope of a recovery, stock markets, as discounting mechanisms, do not appear to be focusing on such short-term news-flow and have turned to hopes of a recovery. The danger is that the forecast period proves to be too long and the recovery is too slow or fails to materialise.