Stock market slump: reality check after grim data

With global financial markets remaining volatile, our head of markets analyses latest events.

A June jolt has resulted in share price falls not seen since the March melee.

Concerns that the market had come too far too fast can be put to one side for the moment as the stern reality checks emanating from the OECD and the Federal Reserve earlier in the week came home to roost. 

The suggestion that economic recovery could be as sharp as the correction seems to have evaporated, with reported spikes of coronavirus cases in Florida, Texas and California prompting fears of a second wave and, in any event, a dampening of consumer sentiment just as it was showing tentative signs of returning.

As such, tourism and travel stocks find themselves under pressure once more, while the Fed’s implication of low interest rates for a prolonged period of time saw bank shares tumble against what will be a difficult trading environment for them in the foreseeable future. A further lurch down for the oil price added to the general malaise, with the manufacturers also lost ground on fears of further lockdowns.

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The net result is that in the year to date, the Dow Jones Industrial Average is now down 12% while the S&P 500 has lost 7%. The Nasdaq continues to be in the vanguard of any economic recovery, with the focus on tech stocks particularly given the changes to work and home life during the pandemic, and the index remains up nearly 6% in the year to date, although off the record highs recorded earlier in the week.

Meanwhile, confirmation of a 20% contraction in the UK economy in April has further dampened sentiment nearer to home, with the opening weakness bringing the FTSE 100 index down 20% in the year to date.

Source: TradingView. Past performance is not a guide to future performance.

It may be that the reset was overdue and that the renewed sense of realism will make any market gains from here more measured. There are certainly elements for optimism, not least of which is the underpinning of developed economies provided by extraordinary stimulus from global governments and central banks. 

Loose monetary and fiscal policy will enable companies to recover more quickly than would otherwise have been the case, while the case for equities as the investment destination of choice is still in play.

As ever, the market does not ascend in a straight line and sharp corrections such as these should not detract from the longer-term view. Benjamin Graham famously noted that in the short term, the market is a voting machine but in the long term it is a weighing machine. This particular correction may have come at an apposite time.