ICAEW.com works better with JavaScript enabled.

The market vs economy dichotomy during COVID-19

6 July 2020: While the economy continues to stall in the wake of the pandemic, this unique moment in history may be the right time to make canny personal wealth management investment decisions, says Mazar’s chief economist George Lagarias.

Lagarias, who is responsible for macroeconomic and investment market analysis within the Top Ten firm’s Wealth Management Division, explained why he believes this to be the case in a recent ICAEW webinar: “Economic update and your personal finances: a COVID-19 world”

And with £1.2bn in client assets under its wealth management arm, he is better placed than most to assess current market sentiment and behaviour. 

As Lagarias rather pithily surmises, it is “interesting to see where we are now, cooped up in our houses, the economy seems like it’s going down the drain… it does feel like the end of times, the isolation, the economic conditions, it’s a rather unique time”.

Lagarias takes participants through a whistle-stop tour of the pandemic’s spread from the first European casualty in Italy to the moment in late February when “markets went into a downward spiral, losing over a third of its value”.

The past is no guide to the future

From a historical perspective, the current crisis is “the first shock to the economy since World War II that does not have anything to do with the economy”, says Lagarias, and that because of the coronavirus, “our fate is not entirely in our own hands”.

Allied to this, he believes that drawing conclusions from the past will not really help us, as the world “has never spent so much on medicine or been this indebted or printed so much non-inflationary money”.

And, says Lagarias, the world has never before put human life before the economy, “so in many ways, this is a first, and drawing conclusions from the past won’t really help us here”.

A key differentiator from then and now, he stressed, is that the world has never been so interconnected, money has never been able to move so quickly and “we have witnessed one of the fastest market drops and rebounds on record”.

Economic and market dichotomy 

Despite the economic gloom, there is still cause for optimism, says Lagarias.

“The market reality is very different to the economic reality”.

Opening up the pages of the economic history books once again, Lagarias points to the current turmoil as the “fastest drop in history”, taking just 22 days to plummet from its peak to minus 20% in the S&P 500, “a drop twice as fast as the 1930’s crisis, and the drop which took 274 days to reach minus 20% in 2007/8”.

But he also highlights the market’s “record recovery” as the S&P 500 quickly gained back much of its losses, some two-thirds of its value, “something that would normally take 23 months.” 

Part of that rapid rebound can be put down to the 8% of the market ‘managed’ by computers. “They don’t wait for humans to feel comfortable - they do an algorithm and make the trade”.

Despite the economy contracting fast, the stock market has lost some 10-15%, which given the wider economic turmoil, meant it was “holding up very well, all things considered”.

“Should I trust it? (the market)”, posits Lagarias.

“Yes”, is the resounding answer as “we have printed circa $4tn in the US and EU alone” with “all of it funnelled into stocks and bonds” via numerous channels.

As a case in point, he stresses that “all the money printed over the last 11 years remains in the system” which keeps pushing up the value of risk assets.

A further truism is that the market and the economy “don’t need to be seen as two things moving together”, while the central banks are making sure those invested in the market do not suffer. 

This current bullish programme of QE has now been in existence for 11 years with no immediately obvious end in sight. But Lagarias warned that should there be a dramatic “rolling back of global value chains” – this will be “very inflationary”, although he suspects this is unlikely to “come to pass”.

It is also important to factor in that traditional metrics only capture earnings and not earnings, allied to wider central bank support, he added.

Mix it up

While risk assets are currently deemed expensive when expressed through the price/earnings ratio, Lagarias is adamant that the markets are where cash should be, as long as it forms part of a balanced portfolio of risk.

Those who held their nerve during the market turbulence and maintained their asset allocation as part of their investment strategy will have benefited from that rebound. 

Lagarias is adamant that now it is still a good environment to invest over the longer term as governments and central banks continue to demonstrate their commitment to the market while investing in the financial economy is “a great way to hedge against risks in the real economy”, he adds.

“We trust in a diversified portfolio to get us out of this,” says Lagarias as “the overarching principle that if I have a little bit here and a little bit there, works very well for investment portfolio principles”. 

Such a stance is based on a sound and proven pedigree, stretching all the way back to the Jewish Torah, Lagarias explains.

“It's still a good environment to invest, but that’s a completely individual thing and I strongly suggest you have this discussion with your financial advisor, but having said that, there’s nothing particularly negative for investments right now. Yes, the economy is going down the drain, but the markets are being specifically propped up by the government.” 

Despite his generally upbeat assessment, grounded in experience, the biggest threat to the wider market is political, he believes

Lagarias fears a hard UK Brexit could unleash “centrifugal forces” in Europe, that combined with the COVID-19 crisis may cause the EU and the eurozone to break apart. 

Such a scenario would lead to “terrible repercussions throughout the global economy” and this “perfect storm” would also “kill consumer sentiment” and be “very bad for risk assets”.

You can watch the full webinar ‘Economic update and your personal finances: A COVID-19 world’ by clicking here.