THE END OF ABENOMICS?
Alan McIntosh, Chief Investment Strategist at Quilter-Cheviot
Global stock markets had another positive month in August with the FTSE World Index closing above its opening level for 2020. US equities were particularly strong. The broad index rose by 7% for the month, the best August since 1986. Although growth and technology stocks continued to perform well, the rise in markets broadened out to include sectors hardest hit by the pandemic – notably cruise lines, airlines and hotels. This reflected the continued opening up of sectors of the economy from lockdown. There is much debate about the shape of the global economic recovery, often characterised by a letter of the alphabet. We have V-shaped, U-shaped and W-shaped as potential candidates. Even the sports footwear industry makes an appearance with some commentators likening the shape of the economic recovery to a Nike “swoosh.” Until we know whether further lockdowns are in prospect, it is too early to say what the outcome will look like, although the recent economic data has mostly been quite strong. In terms of the stock markets, the recovery has very much been V-shaped, the fastest decline in share prices on record followed by the sharpest recovery. The US stock market is now officially in a new bull market, having exceeded its previous all-time high (recorded on February 19th this year) on August 18th.
Stock market indices are made up of individual companies and over the years, inclusion and exclusion in the index mostly reflects advances and declines in relative industry importance. The latest changes to the Dow Jones 30 Index are a stark reminder of this. One of its members, Apple, split its stock into four new shares for every existing one on Friday. Correspondingly, the equivalent share price of the new Apple shares is now a quarter that of the old ones. Because the index is calculated using the sum of the share prices of the underlying companies, a rebalance of the constituent names took place to reflect the much lower “weighting” now accorded to Apple. As a result, out go Exxon Mobil, Pfizer and Raytheon and in come Salesforce, Amgen and Honeywell. Truly a sign of the times.