7th September 2020

Last time we started with the question: What happens when governments stop the emergency support for their economies? e.g. furlough schemes and cheap loans.

Well the dreaded Autumn has arrived, and with it signs of consumer confidence rolling over and bankruptcies heading sharply higher across the Western economies.  And that is before government support is withdrawn or tapered.

Stock markets had been drifting sideways since May/June, but some, the UK in particular, are showing new signs of weakness in recent weeks.

The US is the exception.  No drifting there, as the US stock market has persistently moved to new highs, buoyed by novice investors bored during lockdown, which is not an exaggeration on our part.  Allianz have written a very detailed paper investigating whether this is possible, and have no doubt on the point.

At the heart of what is a fully fledged mania in the US is an app called RobinHood.

The average age of someone with a Robinhood account is 31, and in more than 50% of cases this is the first investment account which they have opened. Although this app is dominated by younger people, particularly those who have become thoroughly bored during the lockdown, they are not alone.

For example, the Wall Street Journal recently told the story of William, a 67-year-old who was trying to make up the lost ground from the falls of 2008 and 2009. He was doing quite well for a while, then became over-confident.  He started investing into vastly riskier ETF/ETNs with leverage or gearing. This meant that if the stock market went up by £1 he might gain £5 or £10, depending on the contract. However, the reverse was also the case – but when you are a novice, even at age 67, and are feeling overconfident, figuring the risks is just not on your agenda.

Within two weeks of deciding to become more adventurous, William lost all his money, $800,000. He had worked all his life to have an enjoyable retirement date, and now it was all gone because of that most damaging of investment biases – overconfidence. But not just any over confidence, but overconfidence based on financial literacy. A horribly dangerous combination.

There is no natural end to such an investment mania.  But as we peek into the Autumn, it is clear there are risks which are not being allowed for in the US stock market with valuations at these levels.  Not least of which are the path of the virus in the winter months, how their economy will respond as government pandemic support is withdrawn, and the (current) likelihood of a clean sweep by the Democrats in the November election.

“When disillusion falls upon an overoptimistic and overbought market, it should fall with sudden and even catastrophic force”

Wise words from John Maynard Keynes.  But it casts no light on when the falls might occur – the “when” is unknowable.  But that doesn’t stop a whole host of experts, many of whom should certainly know better, having a range of dogmatic views ranging from “it will happen tomorrow” to “it will never happen”.

Take Wharton professor Jeremy Siegel.  Even if there is a second wave, he says “I don’t think it’s going to really stop the longer term momentum upward”.  Hmmm.

The madness is not just confined to the US stock market.  One lady at a US town hall meeting exclaimed that wearing masks is “the devil’s law” and a “crime against humanity”, and the cult-ish QAnon believes the pandemic is a hoax, and that Donald Trump is here to save the world from children being farmed for youth serum!

For the rest of us, whether consumers or business decision-makers or investors, we need a bit more certainty, as that will feed into greater confidence.

For example, it is at least moderately encouraging that although virus infections are rising in many parts of the world, the relative levels of hospitalisations and deaths are not rising proportionately.  But we are only in the foothills of winter.

What do we know? 

  • We know we are now entering a seasonably volatile period.
  • We know that huge uncertainty persists around the path of the pandemic with winter ahead.
  • We know that there is an investment mania in the United States.
  • We know that past stock market manias resulted in falls in excess of 50%.
  • Therefore we know there will be (more) substantial stock market falls at some point.

More positively:

  • We know that bull markets (big uptrends) are borne of bear markets (big downtrends).
  • We know that economic recoveries rise out of recessionary wreckage.
  • And we know that there is already some great value in some stock markets e.g. UK, Europe, emerging markets.

Balancing all these things is not easy, we know that too.  As Warren Buffett once said, investing is simple but not easy.  But myself and the team will guide you to the best of our ability, using the experience which we have built over decades.

We are very excited about the potential for years to come which lies beyond this uncertain period, and have been working on a wide-range of research as to how we can maximise that potential when the time comes – more on that from us in 2021.  For now, we remain appropriately cautious, and continue to tip-toe forward.

If you are feeling more immediately optimistic, and wish to have a greater investment exposure, do make sure you talk to your usual adviser.