The recession and its effect on investment markets

I hope you are keeping well, and as I am writing this the temperature outside is 34 degrees so I trust that you are managing to enjoy the weather (although being British, I do feel this is a bit too hot!).

As I predicted in my previous update, the latest GDP figures for the UK have officially shown that we have entered a recession. As predictions go, it wasn’t a particularly bold one, and I think that we all knew this was coming.

To put into context, GDP shrunk by 20.4% in the second quarter, which was broadly in line with the market expectations. Previously, GDP fell by 2.2% in the first quarter. However, lockdown was only announced on 23 March in the UK, so the effect of the pandemic was largely seen in the following quarter.

Nevertheless, this is the biggest GDP quarter drop on record, and is the first time the UK has been in recession for 11 years. However, amongst these very gloomy figures, it should be noted that GDP grew by 1.8% in May, and by a further 8.7% in June.

In addition, with the news of the UK falling into recession and a record quarterly drop, you would have expected the FTSE100 to have fallen in a similar manner. However, you would be mistaken. On the same day that the recession was announced, the FTSE100 actually grew by a very healthy 2.04%.

However, here lies the issues with investment markets compared with economic data and news. If you read the papers, listen to the news or read social media, they tend to very much reflect the economic news, which at the moment is not positive. And that is not necessarily wrong, as being in a recession can affect many aspects of our day-to-day lives.

However, share prices tend to be more a reflection of the future, rather than the present. Official economic data, is of course, in its nature, a record of the recent past. The investment markets already knew this had happened, and as mentioned, the GDP figures were very much in line with their expectations. The FTSE100 rose sharply on the day of the announcements as it sees tiny shoots of the economy beginning to recover, and is hopeful these will continue.

Another example of how the investment markets tend to be ahead of the economic data was seen at the beginning of the pandemic. From the end of February, the global investment markets plummeted as the virus outbreak became a global pandemic. At this point, the official economic data would not have reflected this at all, but the investment markets accurately predicted the impact this was about to have on the global economies.

Having said all this, to reiterate a point in my last update, I still feel the markets are in a ‘wait and see’ period. We are seeing an increase of cases across Europe, and there will be nervousness to see if these develop into second waves. Unexpected good news, such as a proven vaccine, or unexpected bad news, such as second waves, can see relatively volatile movements in the investment markets.

As always, if you would like more information or advice about your investments or any other matter in regards to the markets and the latest economic data, please do get in touch.

Enjoy the rest of the summer, and I hope the warm weather holds (albeit a little cooler for me please!).

Richard Brazier – Director – Hanover Financial Management Limited


 Richard Brazier