Mark Lister, 14 April 2020

How come sharemarkets haven’t fallen further? I’ve had this question thrown at me quite a few times lately. To be honest, I’ve found myself asking the same thing.

Sure, sharemarkets are down from the record highs most of them reached back in February, but they’ve also bounced in a big way over the last few weeks.

The S&P 500 in the US is up 24.7 per cent since late March, while the NZX 50 here in New Zealand has gained 17.2 per cent over a similar period.

subscribe banner

Both these indices are still some 17 per cent down from their highs, but is that enough when we’re heading for the biggest economic contraction in our lifetime?

More than 17 million Americans have filed for jobless claims in the last three weeks, and unemployment could hit 20 per cent over the next month or two. That would be the highest level since the Great Depression.

New Zealand is suffering similar challenges. The June quarter will see a big plunge in economic activity, while unemployment could go close to double digits in the months ahead.

Given that rosy outlook, you could be forgiven for wondering why markets haven’t completely tanked.

However, let’s not forget they have already suffered substantial declines. At their weakest points, the S&P 500 and NZX 50 were down 35.4 and 32.2 per cent, respectively. Even though both have rebounded since, the magnitude of those falls is nothing to be sneezed at, excuse the pun.

We should also remember that Wall Street doesn’t always completely reflect ‘main street’, and that the indices we see in the headlines don’t always mirror the sharemarket as a whole.

For example, the S&P 500 in the US is what we all focus on, but it represents less than a fifth of the listed companies in America.

The top 500 are the biggest ones that are probably holding up best, while the other 80-odd per cent could well be a better indicator of how the average US business is faring right now.

Take the Russell 2000 index, which consists of smaller American companies. At its weakest point it was almost 44 per cent from the February peak, and it’s still 27.3 per cent below those highs.

It’s a similar story here in New Zealand. Our market is small, so bigger companies have a disproportionate impact on the fortunes of the NZX 50.

Two of our best and biggest listed companies, a2 Milk and Fisher & Paykel Healthcare, have both performed exceptionally well through all this. In fact, they’ve both seen their share prices rise strongly in 2020.

These two heavyweights have single-handedly dragged the index higher, arguably making it look much better than it deserves to. Of the other 48 companies, the average decline since the index peak in February is a more sizable 27.1 per cent.

Businesses in the travel, retail, and hospitality sectors have seen their share prices fall even harder, both here and offshore. Some are down more than 80 per cent, so try telling them the market is too optimistic and that it should’ve fallen harder still.

These aren’t the only factors at play. Even though this downturn will be significant, it’s still a self-induced one. Maybe the market thinks a ‘managed recession’ will be easier for us to deal with.

There’s also the not insignificant matter of the kitchen sink that’s being thrown at this by policymakers. This will go some way to softening the blow.

Finally, it’s important to remember that share prices look ahead, and investors all have different time horizons. Those with a 12-month view will be unquestionably pessimistic, as the next year looks horrible compared to any other point in history.

However, for those buying from a 10-year standpoint, how much has really changed? What about over 20 years? Maybe the overall outlook isn’t dramatically different when you’re thinking over those timeframes.

As for me, I’ve been in the buy camp these last few weeks. However, after this rebound I’d be happy to pause for now and sit tight. While opportunities undeniably exist for long-term investors, it does feel like things might have got just a little bit ahead of themselves.