The stock market’s response to Covid-19 was breath-taking in its speed. On 17 January 2020, the FTSE 100 closed at 7,674. We didn’t know it then, but that was to be its high point for the entire year. By 23 March 2020, it closed at 4,993. And while we didn’t know it then, that was to be its low point for the entire year. Investors should give serious thought to the speed at which the markets reacted, declining at high speed, and going from peak to trough in a matter of weeks. Compare this to the events of the financial crisis which saw stock markets go from their highs in June 2007 to its lowest point in March 2009, a period of almost 20 months. Now while the two events are of course completely different, the financial crash of 2007-2008 now seems to have been almost pedestrian in its reaction when compared to a global pandemic.
And it wasn’t just the markets that reacted at speed, because as the extent of the forthcoming lockdown became clear, companies remembered all too clearly the tight credit markets of a decade earlier. With business put on hold for weeks, or even months, companies realised that they had a new and compelling priority: cash flow. In short, cash conservation became king. And one very easy way to conserve cash was to either slash dividend payouts, or just stop paying dividends altogether. That said, I’m still puzzled as to why some companies did it, when they were seemingly almost unaffected by the pandemic.
The extent of the cuts was stark, as 2020 dividends fell by 44.0%, with two-thirds of UK companies cancelling or cut their dividends between the second and fourth quarters. With their domestic bias and sensitivity to the UK economy, medium sized companies were more likely to cut their dividend than the larger more mature companies that have a more reliable dividend. Overall, it is reported that dividends totalling £39.5bn didn’t get paid out, as companies discovered a new source of cheap, short-term finance. Cutting dividends has proved to be relatively painless, and I fully expect that companies will move quickly to do it again, when adverse times re-occur.
While share prices can fall at high speed, we have also seen the recovery move at pace too. The latest round of lockdown restrictions being lifted this week have been very welcome and a great relief for many industries and are further signs of the UK economy getting “back to normal”. And while we are not quite yet back to those market highs seen just 15 months ago, the FTSE has passed 7000 for the first time since the Covid crash and there are signs of optimism among investors that we are getting there, unlike during the financial crisis that took almost six years to do so.