Financial markets endured a volatile week as investors sought to reconcile the short-term damage to economic activity caused by countries going into lockdown with the unparalleled scale of government support measures intended to offset it. Expectation that the US would finally approve a US$2 trillion support package saw near record gains in global equity markets on Tuesday, with the UK’s top 100 companies index gaining 9.05% and the US S&P 500 index 9.38% – leaving them up 2.9% and -3.3% lower over the week.
While the cause of the COVID-19 inspired market weakness is new to investors, equity markets periodically suffering a bout of weakness is not. While disconcerting, it is important to remember that stock markets have moved down to discount a substantial risk, providing long-term investors with a margin of safety. We see that discount unwinding over the next five years as the threat declines and economic activity picks up – carrying stocks higher.
While we do expect further volatility over the coming weeks, we have started to take advantage of lower share prices by modestly reducing Alternatives, which have ably fulfilled their defensive role, and adding to equity holdings.