In this week’s market update: the US is in focus as the Trump presidency goes out with a bang and earnings season begins; the bitcoin bubble inflates further; and investors weigh up the holiday season with the usual string of trading statements.
All eyes are on the US in this the final full week of the Trump presidency. Last week’s violent scenes at the Capitol bring the last four years to a typically unpredictable and chaotic close and the hope is that the next nine days can pass without further serious confrontation.
Donald Trump, now cast adrift from his Twitter megaphone, has said he will not attend Joe Biden’s inauguration on the 20th. Most people will just be glad after the storming of Congress that we have made it to the official transition to the new administration with America’s democratic institutions intact.
There is plenty of political activity behind the scenes, but the more extreme outcomes - a successful impeachment of the President or the implementation of the 25th amendment to remove an incapacitated head of state - look unlikely at this stage despite the Democrats lodging a second article of impeachment against Donald Trump this week. Either there isn’t enough time left or the support from the Republicans isn’t there. What does seem certain is that the President will not leave of his own accord before next Wednesday.
Markets took the upheavals in their stride last week, focusing instead on the Democrat victory in the Georgia senate run-off which handed the new President at least two years control of both houses of Congress as well as the White House.
This is the only set up in Washington that really allows a President to push through a remotely contentious or partisan policy agenda and investors see it as opening the door to more fiscal stimulus, possibly leading to more inflation.
It is this prospect that has led to Wall Street hitting new highs despite still terrible Covid data in both Europe and the US and last week’s disappointing non-farm-payroll data which show the economic recovery is stalling. This week has been tougher going. The S&P 500 fell 0.7% yesterday and the FTSE 100 was 1% lower. Asian stocks picked up that tone falling slightly on Tuesday.
This week also sees the start of fourth quarter earnings season in the US, with the big banks kicking things off on Friday. So, we should soon have a better picture of whether the pick-up in earnings that investors are counting on in 2021 and next year will have to be reassessed.
For now, the reflation trade is still on track. The cheaper, out of favour value stocks in the US are quickly closing the gap with the growth stocks that have been in favour in recent years. Cyclicals, value stocks, small caps, commodities and non-US shares are all in favour in a marked reversal of recent trends.
Emerging markets, in particular, have outperformed the US strongly. Meanwhile commodities are looking as if they are enjoying both a short-term tactical outperformance on the back of economic recovery in China but possibly also seeing the start of a longer-term structural period of outperformance.
Industrial metals are at multi-year highs and oil is above $50 a barrel. Gold too moved back towards $2,000 an ounce last week before reversing its gains.
A big question as we move into 2021 is whether investors will enjoy a co-ordinated fiscal and monetary stimulus. This is extremely rare and when it comes very good for asset prices. It is the expectation of this double whammy that has fuelled recent market exuberance with investors looking back to the post-second-world-war period when rebuilding after the conflict was boosted by persistently easy interest rate policy too.
That led to strong market returns until inflation returned to spoil the party in the 1970s. The return of inflation remains a big unknown in the current cycle with the Japanese example of recent years showing that spending big by governments and central banks need not necessarily lead to spiralling prices.
The fear of inflation is already showing up in the performance of alternative assets like gold and, more noticeably, bitcoin.
The crypto-currency is seen by some as a safe haven in a perceived environment of currency debasement thanks to its in-built supply limit. There will never be more than 21 million bitcoins in existence so unlike a paper currency like the dollar or the pound it cannot be printed at will by governments in need of cash. This makes bitcoin even scarcer than gold which continues to be mined albeit this does not expand the amount of the precious metal in existence by a huge amount every year.
The price of bitcoin soared above $40,000 last week, meaning it has quadrupled in price since last summer. Many supporters are suggesting that the price has much further to go and the fact that many holders are in for the long haul with no intention of selling could make further price rises self-fulfilling.
But anyone who remembers what happened in 2017 will be more cautious. Then the price soared to $20,000 before quickly falling back to around $4,000. The volatility in bitcoin is one of the key arguments against its use as a safe haven asset.
Bitcoin is just the frothiest part of the market today. There are other signs of excess emerging too such as parts of the IPO market for new issues. The performance of Tesla, for example, has made founder Elon Musk on paper the world’s richest person. Tesla is now valued at more than most of the major car makers combined.
Jeremy Grantham, founder of the GMO fund management company and a prominent market commentator, said this week that he saw the US stock market in a ‘fully-fledge epic bubble’. He warned about ‘hysterically speculative’ investor behaviour.
Grantham is well-known for his bearish views and in recent months his pessimism has been off target, but nay-sayers always do look out of touch in the final explosive phase of a bull market before being proved spectacularly right in due course. Given that he has compared the bull market since the 2008 financial crisis to the South Sea bubble, 1929 and the dot.com boom of 2000, investors will pay attention to his stark warning.
Back over here, the principal focus in the second week of the year will continue to be a steady string of holiday season trading statements. This week, we can expect updates from: JD Sports, Just Eat, ASOS, Persimmon, William Hill, Page Group, Tesco, Boohoo, Primark-owner AB Foods, Taylor Wimpey, Halfords and many others.
It is bound to be a mixed bag. Some parts of the retail sector - including the supermarkets - have fared well during lockdown with little competition for shoppers’ attention either from other shops or from alternative ways of spending our time. A trip to the supermarket is fast becoming the main leisure activity for many of us.
For other businesses, however, the somewhat chaotic transition from November’s lockdown to a partial re-opening and then back to lockdown again in January will have provided a very difficult backdrop to the Christmas period.
An indication of the challenges was given today by Land Securities, one of the UK’s biggest landlords, which said it had received just a third of the rent owed to it by retail tenants in the three months to Christmas Day.