Markets near the lows but watch out for new tests

Financial markets are waiting to see how much the economies will have to pay at Covid-19 and what resources governments and central banks around the world will put on the plate to pay for it. Waiting, in particular, to appreciate the effectiveness of the fiscal stimuli announced in the various capitals of the world during the past week. In London, Berlin and Rome, the line seems drawn, but in Washington there is a debate: the Republicans are accused of thinking only of bailing out corporations, the Democrats of wanting to spend too much on healthcare.

The Simplify 02 management team is also waiting: we want to see the stock market to grow for a number of consecutive days before taking action. In this sense, positive news on the evolution of the pandemic or on tax actions would certainly be a stimulus.

Meanwhile, indiscriminate sales of securities continued all last week and on Monday, a trend fueled by those managers who, by their nature, need to rebalance the risk of their portfolios. Rebalancing risk is an effective management technique in periods of low volatility and foreseeable trends, but in phases like this, with volatility exceeding the historical average by 7/8 times, it would be preferable to keep strong and go through the storm. Proof? Pension funds, investors with a long-term horizon, have already started buying again.

The good news yesterday was that the sell-off seems more manageable than the past weeks: Wall Street managed to open without being immediately suspended down.


The feeling is that the current week is important to get an idea about the future. Thursday, for example, the first data on American employment since the beginning of the crisis will be published, one of the most anticipated in recent history, although the most predictable datum perhaps. It will also be important to assess the firmness of political leadership: delays or uncertainties would trigger new sell-offs.


For this reason, for a while longer, we prefer not to use the ammunition we have available, limiting purchases to stocks of companies with significant cash reserves, with businesses less exposed to the effects of the pandemic and with solid competitive positions. These purchases, while allowing us to start accumulating valid assets at enviable prices, expose us to the volatility of the moment.

Two final considerations. The first: the approval of concrete tax measures, especially in the United States, will probably not mark the minimum point of the markets, but will give the measure of what politics can do and, probably, will create the basis for a longer-lasting rebound. The second. Analyzing the extreme oversold situations of the past, the sell-off of the past few weeks is comparable to those of 1987 and 1929. On those occasions, after a sudden descent and a ready rebound, the markets tested even lower lows. The worst reversals of the American markets, those that occurred after the inversion of the rate curve, had a negative average of 30/35% between the beginning and the end, in these days we are at 31.8%. It seems we can say that we are close to a turning point, but it is preferable to wait for a clear sign of recovery before using the cartridges that we have so carefully preserved in the past months. Although human nature leads to the challenge of buying on lows, it is prudent to wait for new lows to be tested.

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Simplify is an AIF umbrella fund, is authorised by CSSF in Luxembourg and passported in Italy and Sweden. The fund is managed in London.