Market recovery: join the party or prepare for pain?

The market euphoria is like your neighbour having a raucous late night party and you have to get up for work in the morning - only join in if you can stay the course
Jonathan Sloan

SINCE the dramatic market sell off at the end of March, equity markets have posted some impressive bounce back returns in recent weeks. The leading US index has seen a 30 per cent recovery from its trough.

In line with the market recovery, investment sentiment has reached a level of relative euphoria, which can seem out of step with the mood of the general population.

So let's look at what is driving this investor sentiment and, furthermore, we ask: should investors try to ride the wave, or are investors more likely to be disappointed?

There are two main drivers of investor exuberance; primarily, markets are moving in step with developments in the management of the virus.

While some countries remain on the upward trajectory of virus transmission, a growing number of global economies are starting to emerge from lockdown and a post-lockdown (if not post-virus) economy is starting to emerge in many nations.

In addition, the news flow on the potency of the virus, improved management of patients, and the possibility of enhanced containment is much more under control; and the potential for a vaccine is closer than it was 3 months ago.

The other major catalyst for optimism has been the staggering amount of intervention which central banks and governments globally have deployed. This has both supported the real economy and convinced investors that action will be taken on a global and coordinated basis.

So taken all together, this has led to a sense of investor positivity. But, words of warning: such euphoria and high hopes inevitably lead to a potentially higher risk of investor disappointment.

With markets moving in tandem with virus and lockdown developments, it doesn't take a huge leap to imagine that a major second outbreak, or any significant regression back towards lockdown, could lead to a softening of prices.

Of course, we are also heading (eventually) towards the gradual withdrawal of government support and economic stimulus. This will be crunch time for many economies, as the supports are removed and businesses begin to stand on their own two feet again. At this stage, we will get a more realistic view of where consumer demand and employment figures stand.

Investors, as ever, are reminded to ensure that their investment portfolio is aligned with their long-term objectives and invested with an appropriate amount of diversification.

While nothing can be guaranteed, a one-trick-pony investment strategy is either going to delight or seriously disappoint, and the one thing we know for sure is that no one will shout too much about their crushing fails.

Let's pretend the market euphoria is your friendly neighbour having a raucous late night party next door and you have to get up for work in the morning.

As tempting as it may seem to join in, be sensible and only join in if you can stay the course!

:: Jonathan Sloan is director at Barclays Wealth & Investment Management, Belfast.

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