Monthly Market Reports
Each month, investment journalist David Stevenson compiles an overview of markets for UKSPA subscribers. You can see reports from previous months below.
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US markets seem a tiny bit steadier as I write this and we all know that sentiment in the US dominates everything. By my calculations we have recently passed the fourth bounce back since the start of this bear market. As I write this the S&P 500 is now down just under 20% from its peak at the beginning of this year – down 18.9% to be precise.
I have this working hypothesis which is that there are two sorts of bearish investor out there. The first sort is short termist and thinks that yes, interest rates are rising, and that we are a short step away from a slowdown which might turn into a recession. This group think that once we get to recession we’ll see interest rates and inflation come down sharply and we’ll be sort of back to a more normal macro economic regime.
This time it really wasn’t that different. Professional contrarians such as yours truly had been wondering what the markets needed to jolt them back into reality. Inflation was rising, interest rates were rising, the Russians were stomping all over the Ukraine and consumers were suffering and yet for much of the first quarter the stockmarkets continued to power ahead.
Like many I’m astounded by the solid stockmarket bounce back in the last few weeks. Every time something positive emerges out of the Turkish peace talks involving Russia and Ukraine investors start buying. Quite what possesses these investors is beyond me, as its obvious to me – and many millions of other sentient human beings – that the Russians are simply playing for time in order to regroup and then pulverise the cities of Eastern Ukraine.
The average UK citizen has a take-home income of around £30,000 or £600 per week. If we are to believe the stories emerging of $200 a barrel oil and much worse, then I think it perfectly reasonable to presume that the average consumer might face extra domestic costs of at least £1000 to £3000 a year in extra energy costs.
As usual there’s lots of known unknowns swirling around the markets, impacting fragile sentiment at the moment. Inflation tops the list but there’s also the worry about Russia and the Ukraine. These known unknowns are difficult for investors to process because they can’t really second guess the players and processes.
I have no idea what will happen in 2022 but of one thing I am reasonably sure – all eyes will be on China. What happens in the land of the CCP increasingly matters to all of us and frankly any macro takes on investing that avoids discussing what happens to Chinese consumers and exports is missing the point entirely. My gut tells me that China is in for big trouble in 2022 and because what happens to China matters to the rest of us, those travails will affect all of us.
Now that Omicron is upon (!), I think I have no other choice than to start this month with a discussion of the impact of the virus. This time though its not on us, the West or even Africa. Instead, I want to focus on China and what I believe is the single biggest unrecognised threat to the global economy, namely China and its Zero Covid mistake.
By and large I’ve turned more bearish in recent months but it’s completely possible that I’m entirely wrong about my grim warnings. I’ve been scaling back my equities position marginally but if I’m honest I’ve not sold too much – its mainly just not investing fresh cash. I certainly haven’t started putting on log volatility positions, yet. Perhaps this is a classic case of cognitive dissonance.
Yet again I find myself musing about whether we are at a tipping point in the markets. I’ve been expecting a nasty sell off for months now and all we’ve had to date are some sporadic sells punctuated by equally frequent rallies. Suffice to say that I continue to think a proper correction is due – by which I mean at least a few days of negative price action, amounting to a 10 to 20% main benchmark index decline.
Well, so far the old adage about selling in May and coming back on St Ledgers day isn’t panning out again. After a few wobbles, the markets have taken the summer and Jackson Hole in their stride. According to Fidelity since May global markets have enjoyed a rewarding summer, with the FTSE All Share rising by 4.52% between 1 May and 31 August while the Nasdaq rose by 21.58%.
I want to start this month’s report with two, contrasting, charts which speak to the bull and bear impulses pulsing through the market at the moment. For all the bulls out there, we’ll start with the first chart below from a recent edition of the Sunday Briefing. It shows the percentage of buy recommendations on the 1000 largest US stocks. If this isn’t a strong buy indicator, I’m not sure what is!
My overly simplistic view of cycle within stock markets is as follows. For reasonably large periods of time, equity investors behave as a herd and stampede valuations higher across the board. In these synchronised bull markets, most faintly growth-oriented assets push higher consistently, volatility subsides and correlations increase. Call this the positive momentum phase.
The old idea of selling in May and coming back later in the year (September/October) hasn’t worked out terribly well over the last few years. But 2021 might just be another year in which such simplistic strategies make their mark. Why my caution? Put simply there’s another old adage which says that when the real economy starts to boom, investors divert their money to real world purchases such as new cars or holidays
In momentum driven markets – which we are smack bang in the middle of currently – everything is about liquidity flows (see our later section on equities) as well as businesses racing to get away IPOs before it’s all too late. If you doubt that we are in such a market – which cave are you in – then look at the chart below which comes from a recent issue of the excellent Sunday Briefing intelligence publication.
The founder of US fund management firm Jeremy Grantham has (yet again) warned that US equities are in a bubble. He is not alone in airing considerable scepticism about equity valuations. Many professional investors and advisers I talk to grimace about valuations but argue they have no other choice – TINA as its called!
My favourite new golden rule is simple to understand – “don’t get too hung up on politics as an investor”. Precisely because we all have our own biases, we then tend to project them on to geopolitics and elections. Take the US presidential election which Democratic candidate Joe Biden now seems to have won.
Much as we stock market observers love to babble on about valuations, I’ve long been aware that this is largely a futile exercise. My favourite trick is to go Robert Shiller’s stockmarkets data website, and call up the CAPE data for US equities. Hey presto – a complete train wreck! US equities are horribly overpriced. Sell! And if we’re selling the US, we may as well sell everything else.
It had to happen. At the very beginning of this month (September) the US equity markets finally wobbled after a long summer of positive price momentum. The chart below shows the S&P 500 for the last couple of years with the red line the 20 day moving average, the blue line the 200 day moving average.
As it’s summer time and frankly most of us are past worrying about whether we’re in a V, U, or W (swoosh is the alternative designation for W) scenario, I thought it worth touching on two hard nosed charts that I think should make all of us a tad cautious as we head into the autumn. They’re both from quant analysts at French investment bank SocGen and they emerged in a publication called the SG Practical Quant Investor.
As we head into May, more than a few investors I speak to are growing a tad nervous. They sense that markets might have got slightly ahead of themselves and are worried that once some of the more sordid realities of the Covid emergency become obvious – maybe no vaccine for years – sentiment might turn bearish again.
President Xi of China must have been hoping that the new year might signal a break from his legion troubles. Those pesky tariff issues look like they might calm down and Hong Kong is looking less volatile than it did at the end of last year. And then along comes the coronavirus.