The recession of 2020 is not over yet. But stock markets have shown exceptional performance since late March. Some analysts even talk of stock market bubbles, whereas others are afraid of missing the rally. Who is right, and how should we invest now to retire early?
Recession is here
The macroeconomic indicators are in an extremely bad condition right now. The UK’s public debt level is at a record high. For the first time since 1963, it even exceeded the country’s GDP. Private households are in an uneasy situation too. Wealthier individuals may be able to save money as they cannot go out or travel this year. But others have lost their jobs and are facing serious problems. As a result, spending levels are low and will probably remain quite low for a while. Many economies worldwide, including the UK’s economy, are reopening, but I would not trust that. Even though the pandemic will eventually end, there is already a second wave of infections. This could lead to another lockdown, which would make things even worse.
Risk factors
As I have mentioned before, one of the main problems is the US-China conflict. It is not just about trade war uncertainty and political tensions, but also about many countries’ willingness to hold China accountable for the coronavirus outbreak. This could lead to stock market volatility as well as a lengthy recession.
For FTSE 250 investors, a no-deal Brexit is, undoubtedly, the main source of risk. In my view, however, it is only part of the de-globalisation process. The pandemic put significant pressure on air flights, logistics, global trade, economic, social, and political ties. Many countries will probably try to reduce their dependence on other countries. They will try to become more self-sufficient in order to prevent various shortages and logistics disruptions from happening in the future. For example, some companies might wish to move their production from China to their home countries. But this will raise their production costs since workers’ wages in China and other developing countries are much lower than they are in the US and the EU. So, it will put many global corporations’ earnings under threat.
However, I don’t think that the stock market fully reflects this. My colleague Edward Sheldon quoted legendary investor Jeremy Grantham, who noted that this rally has no precedence, and the financial fundamentals look quite grim for many businesses. Meanwhile, the FTSE 100 index has risen 30% from its March lows. The S&P 500, in turn, is up almost 40%. So, in Grantham’s view, we are in a bubble. This is a position that CNBC’s Jim Cramer, the host of Mad Money, shares. In his view, “it’s almost as if people decided Covid is over. It’s a ‘V-shaped’ rally, and you better get on board”. But the thing is that it is not over yet and it is risky to behave as if it has.
What should I do now?
None of this means that an investor should refrain from buying shares right now. But it is important to choose them carefully and avoid overpaying even for “good companies with a great future“.
