Before I get started this morning – listen to Merryn's podcast with Russell Napier if you haven't already. It's great, and it's got all you need to know about the big picture backdrop for the year – if not the decade – ahead. Seriously, even if you never listen to podcasts, listen to this one.
OK, back to this morning. Hmm. Where to begin? On Saturday afternoon I was picking up last-minute Christmas presents (that counts as surprisingly organised for me) and I got a text from my wife alerting me that we were now in the hitherto undiscovered territory of Tier 4. “What's Tier 4?”, I wondered. Well, now I know.
We've gone from “vaccines are here!” to “mutant coronavirus cancels Christmas!” We've gone from “a Brexit deal is imminent!” to “nothing is crossing the border as of now!” That's quite the turnaround since Friday night. So let's unpack this a bit and think about what – if anything – it means for your investments.
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It all ends in tiers (sorry)
First, this mutant virus bit. I know nothing about it except the bits and pieces I've read in the papers (and I assume that they don't know much either). But in terms of risks, the major investment issue here is that the mutation extends lockdowns beyond what we'd all hoped.
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It may extend lockdowns because it turns out to be vaccine resistant (I hope not and there's no one saying that it does, but I didn't expect to be locked down for Christmas either). It may extend them simply because the government has decided to err very aggressively on the side of caution. The point is, it delays the recovery and increases the risk of scarring. It's pretty clear that the government reckons this is going to be us until at least Easter (chancellor Rishi Sunak extended the furlough scheme to the end of April just before this, so that was probably a good indicator of the direction of travel).
That takes us to the second, and linked issue – the fact that we're now international pariahs. It's all a bit confusing, but unsurprisingly, the news that we have a strain of coronavirus so infectious that it's driven one of the least impressive government U-turns on record, has prompted other countries to say: “Keep that away from us!”
Whether it turns out that Britain is just better at sequencing these things than other nations (in other words, we found it because we're looking for it) is a moot point right now. The fact is that the borders are closing. Every country in the world has seen that New Zealand is the most-lauded developed government of all. And the one obvious thing they did is stop people flying. So that'll be the first port of call for panicky governments around the globe.
All of this is bad news for all the "rapid recovery" trades that have shot higher in the last few weeks. Travel stocks are taking a hit, and the oil price is down nearly 5% this morning (as measured by Brent) which is unsurprising. If we can't fly and we can't drive, we don't use petrol. And if that's the case, well, the recent surge in the oil price probably needs some froth knocked off it.
Moreover, it also creates ripe conditions for panic. Watching the markets this morning it's pretty clear that markets are making the classic "risk-off" move – rushing for the "safety" of the US dollar. There's also the prospect of "liquidation trades" – where investors take profits on what's worked recently to cover margin calls elsewhere. (This also comes on top of it being near Christmas, and so markets more likely to see big moves because there are fewer traders around).
Do you have a plan? Then stick to it
So what does it all mean for you? Well, I realise I'm a bit of a stuck record on this. But most of this really only matters if you're a day trader (and if you were ever tempted to become a trader, these are the kinds of days that people warn you about – this is why it's hyper-risky). Anyway – that warning aside – if you were happy with your asset allocation and your current long-term investment plan on Friday, then there's no reason to change it because of what happened over the weekend.
This might well push the economic recovery timeline further into the future. What does that mean? It means more government support will be needed. As I noted above, Britain's already extended the furlough scheme. And the US has finally agreed on a new "mini" stimulus package for individuals and small businesses. The funny thing is that we're calling it a compromise stimulus. But at $900bn, it's still the second largest economic relief bill in history, as the Financial Times points out. Last time they spent $2.2 trillion, but $900bn is hardly small change. On top of that, it means more central bank activity for longer.
Please don't get me wrong. None of this is good news. I can't say I'm happy about it. But if you just want to talk about your investments – and that's what I'm here for – then beyond fluctuations in the markets today, the overall direction of travel is still the same. The economy gets pumped full of stimulus while it's under the weather. When it stops being under the weather – and all this does is push that day further out a bit – then the stimulus is still hanging about, and we get all the inflationary pressure kicking off.
So don't panic, don't make any sudden moves, and try not to read too much newsprint over the Christmas period because a lot of this stuff is going to be idle speculation, bad science, and politically motivated column inches. If you have a plan, look for opportunities to buy good quality assets you may have thought you'd missed the boat on. If you don't have a plan, get one.
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