The week to Tuesday’s close saw the return of volatility, with large falls in the US on Thursday largely reversed over the rest of the week. The UK FTSE100 ended the week down 1.4%, the US S&P 500 down 2.1% and the FTSE Euronext 100 down 1.2%.
In recent weeks we have highlighted how the scale of the rally had surprised many, with the technology-driven NASDAQ Index rising above its old highs and the broader US S&P 500 not far off its old high. Legendary investor Warren Buffet is often quoted as saying that in the short-term the market in a voting machine but in the long-term it is a weighing machine. Many companies have withdrawn their guidance on expected profits and with a lack of any precedent on which to rebase estimates – there is no similar event – analysts and investors have had precious little to weigh but have voted conclusively for recovery.
While market reports attributed the cause of Thursday’s falls to a resurgence in Covid-19 cases around the world, perhaps the widely expected ‘second wave’, the numbers reported are tiny and there was an expectation that Covid-19 would remain a problem for some time to come. Any plausible trigger could have caused the rout. The reality is that as equity markets approached old highs it became increasingly hard to vote for a continuing ‘recovery’ rally to rather than to weigh up what we know and take some risk off the table while the market establishes a new trend. One that more accurately reflects what companies are telling us about the actual impact of the pandemic on their businesses.