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We have only just hit the middle of the year, but 2020 has, so far, been a whirlwind season for equity investors. Since the start of the year, the novel corona-virus (COVID-19) has been the dominant theme in the markets, dictating investor sentiment and influencing the direction of market capital. The virus triggered a global pandemic and not only altered the normal routine of human living, but also the somewhat predictable behavior of investors.
Panic in the Markets
Equities were still trending higher by February 2020, but investors quickly grasped the danger of the health hazard as governments across the world implemented lockdown procedures that shut down economic activity globally. This triggered a widespread selloff that ensured stocks shed off an average of 25% by the end of Q1 2020. Still, the underlying investor sentiment was that a dip (no matter how devastating), catalysed by a health hazard rather than business fundamentals, represented a great opportunity to buy dips in a bullish market. Prevalent options trading strategies also were based a contrarian bullish opportunity in a panic selling environment.
During the start of Q2 2020, investors would quickly buy dips or aggressively extend their bullish positioning at the slightest hint of optimistic news. And there were plenty of them. Governments had started to ease lockdown restrictions amid positive coronavirus news in terms of death tolls as well as recovery and prevalence rates. Concerns of a second wave of the virus also ignited some anxiety and caused some instances of panic selling, but investors were seemingly more interested in positivity and would take every opportunity to buy falling stocks. These investor concerns have mainly come from jurisdictions that lifted lockdown measures as well as the possibility of increased infections as a result of widespread anti-racist protests in the US.
Central Banks Take Action
Beyond coronavirus updates, fiscal measures have also provided a tailwind pressure to equities. To ease the economic burden induced by the global health pandemic, central banks around the world implemented various quantitative easing measures and reduced base interest rates. The availability of cheap credit has ensured that investors have had a risk-off stance in the market, aggressively betting on the return to normalcy rather than maintaining an overly cautious optimistic tone.
So, what about safe havens?
Safe Havens in Market Turmoil
In times of panic, investors naturally drift towards safe-haven plays, and that has been the case again this year. Gold has managed to maintain an upward trajectory throughout 2020, but the yellow metal also bled furiously during the final weeks of Q1 as oil prices printed negative values due to spats between Russia and Saudi Arabia. During Q2 2020, Gold has sustained an upward bias but not necessarily as a result of investor safe-haven plays. As stocks have edged higher, investors have been conflicted on what the future holds for price action. Indicators have shown that institutional investors have a cautionary stance while the bulk of the retail investing community has thrown caution to the wind. Institutions have every reason to maintain caution, but retail investors are more confident following the central banks that are propping up the economy. Overall, the conflicting signals in investor sentiment continue to bode well for Gold, which also remains supported by inflationary concerns as the majority of governments literally print more fiat.
So where is the opportunity?
With investors on both ends of the spectrum, the markets will seemingly maintain volatility in the short and medium-term. In the long term, the resumption of economic activity and the eradication of the corona-virus threat (probably through the launch of a vaccine) will dictate investor sentiment. There is no definitive timeline for this, and this essentially means that opportunity in the market is currently only available in the short term. There is no clear signal for market direction, with this pointing to a spiky ranging market characteristic of investor indecision. Sharp dips will attract optimistic capital whereas big jumps will inspire profit taking and short sellers. With the US also gearing up for what is set to be a close and hard-fought general election in November, investors must be alive to the fact that volatility is here to stay. Range-bound plays (buying troughs, selling peaks) will no doubt be the smart money move if a volatile consolidation period dominates the second half of 2020. There is no need to either back bulls or bears; just back them both!