In this week’s market update: markets break out of their recent range on vaccine hopes; Brexit talks hit the final straight; and retail is in focus at the end of earnings season.
Shares have been on a roller-coaster ride since the Presidential election. The contested, and closer than expected vote, was quickly followed by last week’s early vaccine hopes to provide investors with plenty of both good and bad news to focus on. The good news is that this two-way pull seems to be resolving itself positively for now. Markets are hitting new highs again after a couple of months in the doldrums.
This new optimistic outlook is also showing up in increased M&A activity. Just this week nearly $40bn of deals have been announced as companies look to take advantage of more political stability and still cheap funding. Yesterday the US operations of Spanish bank BBVA were sold to Pittsburgh based PNC for $12bn. Home Depot expanded with a $9bn purchase of HD Supply. And there was a string of smaller deals too.
On the political front, we are in limbo for the next few weeks. Although the White House looks to be safe for Joe Biden now, the current President is yet to concede and legal challenges continue, albeit with little or no success so far. The more interesting question continues to be whether the Senate will stay Republican or swing to the Democrats and for that answer we will have to wait until January.
That’s when a run-off will decide two Senate seats in Georgia. At the moment these are the dividing line between a small Republican majority and an evenly divided Senate subject to the vice President’s deciding vote.
The ability of the next President to push through his tax and spend agenda will be seriously curtailed by a hostile Senate. And as fiscal stimulus has been a key part of the bull case for shares, that matters a lot to investors.
The good news, however, is that a return to normality may be closer than hoped for despite, in the short run, the Covid situation getting worse rather than better. The markets being a discounting mechanism, they are looking through the rise in infections to a brighter picture in 2021.
The good news on the vaccine front was given a further boost this week after a potential jab from US biotech Moderna showed a 94.5% efficacy rate in clinical trials. That beat even the 90% positive score for the Pfizer vaccine announced a week ago.
The Moderna jab also looks more practical than Pfizer’s, being able to be transported and stored at less extremely low temperatures.
Shares moved higher on the latest good medical news, with the FTSE 100 closing 1.6% higher yesterday and shares in New York rising 1.2%.
The S&P 500 had already pushed forward to a new all-time high last week on the back of this renewed optimism and nearly three-quarters of America’s leading stocks made a new four-week high in recent days. From a technical point of view, the sideways moving volatility since September seems to be resolving itself by reverting to the previous up trend.
The upward momentum is being driven by a recovery in the so-called re-opening stocks. These are the shares in bombed out areas like hospitality, retail and travel that need a return to normality to get back on their feet. The good news is that the bounce back in these areas is not really at the expense of the previous winners in technology and healthcare. They are outperforming relatively but the recovery is broadening out at the same time, a good sign.
It’s not before time. Over the past decade growth stocks have risen by 225% compared with just 88% for the value index. This year has seen that trend accelerate, with growth stocks up 25% while value has fallen 7%.
This is reflected in valuations, with growth stocks now trading on 38 times earnings while value stocks are on a PE of just 17. That gap is even wider than during the dot.com boom.
It’s not just styles that are pointing to a rotation. The size effect is important too. Smaller companies are starting to outperform larger ones. And that is typical at the start of a bull market. In some ways, the market is looking more and more like it did in 2009 when the post-financial-crisis rally began.
To keep that momentum going, company earnings are going to need to continue rising as they have through the better than expected third quarter earnings season. Six months ago, the average earnings expectation for the US market was $120 per share, today it is $132 and $163 has been pencilled in for 2021.
In time that will bring down the valuation multiple of the market and justify prices rising from here. This is the difficult time for investors in the cycle. After the pain of a big market fall, it can be hard to believe that a market now hitting new highs can continue to rise.
Over here, the focus is less on the market and more on Brexit, with negotiations heading towards the wire against a backdrop of civil war in Downing Street. There is a lot more to worry about on this side of the Atlantic than in the US right now.
The Brexit talks are in the final straight this week, with both sides accepting that if a deal is to be done in time for ratification before the end of the year then it needs to be thrashed out this week or early next week at the latest.
The crucial sticking points remain fishing rights in British waters, level playing field conditions for business and enforcement arrangements for these.
On Thursday, a videoconference of EU leaders stands as the first real deadline this week. Brexit is not technically on the agenda but it could be added. If there is no progress by then all is not lost but time is definitely running out. The European Parliament has pencilled in a vote for its final session of the year on December 14. But for documents to be prepared for that session, an agreement would really need to be in place by now. It’s all very tight.
The Brexit drama is taking place against an unhelpful backdrop at home, where a series of high-profile departures from Downing Street, including the influential adviser to the Prime Minister Dominic Cummings, has painted a picture of a fractured government, at war with itself and with the Conservative party’s backbenchers.
To cap it all, the Prime Minister has been forced to self-isolate after coming into contact with someone who tested positive for Covid. That looked like it could get in the way of his plans to reboot his government with a planned big speech on the green economy, part of the plan to rebuild better from the pandemic.
A planned reshuffle of cabinet in the wake of last week’s departures is expected in the New Year, including a return of Sajid Javid, the former Chancellor who fell foul of Mr Cummings but is an ally of the Prime Minister’s fiancée Carrie Symonds.
On the corporate front, this week sees the last few announcements in the third quarter earnings season, which has gone much better than many expected. The sector focus this week is very much retail, with a string of results on both sides of the Atlantic. In the US, we will hear from Target, Macy’s, Walmart and Home Depot. Over here, Kingfisher, Asda, Halfords and Naked Wines are all due to announce results.
There’s a sprinkling of important economic data too. Yesterday’s highlights included retail sales in China, which grew at their fastest rate this year in October. Sales were 4.3% higher, better than the 3.3% rise in September. Despite this, sales for the first ten months of the year were still 5.9% down on last year.
Also out yesterday was Japan’s GDP, which rose by 5% in the third quarter, beating expectations of a 4.4% rise. However, Asia’s largest developed economy is still 6% smaller than it was a year ago, suggesting that recovery will be long and difficult.
The recovery in Asia was given a further boost yesterday as 15 countries signed a trade pact. Shares across the region rose even before the good news on the vaccine front yesterday. The region is also enjoying the prospect of a more measured relationship with the US under President Biden than has been the case over the past four years.
In other markets, the oil price also rose usefully as prospects of a return to normality improved. Brent rose above $43 as oil joined in the rally in all risk assets.