The main driver behind the recovery appears to be technology sectors, reaping the stay at home rewards of an economy in growth freefall. The future will likely involve more commercial use of technology and sustainably higher returns to many of these companies. For markets more generally, however, the immediate future may not be so ebullient. We continue to expect another meaningful correction lower.
Equity markets have recovered a long way since the depths of the initial down draft of February and March this year. At the worst point, the US equity market was down 34% peak to trough. That felt very much like the ballpark equity market adjustment to previous recessions (Figure 1). Now, with equities just 15% below previous peak it seems unbelievably complacent.
Since the equity market lows, the unemployment rate in the US has risen to almost 15% from a 50-year low of just 3.5% (Bloomberg 2020). To place that in context, the previous high over the last 70 years was just 11%. The most worrying aspect, however, is that the weekly unemployment claims suggest the unemployment rate will continue rising. In the UK, the Bank of England have released forecasts for growth. These forecasts suggest we are in the deepest recession for 300 years (This is Money). Not much cheer there. So why then the recovery in equities? The first clues come from comparing equity returns across countries.