In this week’s market update: correction fears cloud the outlook; US politics gets back to normal as bi-partisan splits emerge on stimulus proposals; earnings season is in full swing; while over here Brexit is back on the radar.
Sometimes it is better to travel than to arrive. While investors were faced with relentless bad news on the pandemic, the economy, Brexit and the US political scene, they seemed happy to look through the gloom to the sunlit uplands beyond.
Now that the end is perhaps in sight on at least some of those issues, markets are starting to focus instead on the unfinished business, the things that remain unfixed and problematical.
So counter-intuitively, it is the roll-out of the vaccine that looks like it might be the trigger for a market correction while throughout the past year it has been the prospect of a vaccine-led re-opening of the economy that has fuelled a remarkable V-shaped recovery.
As we’ve seen in recent weeks, old hands who have lived through booms and busts before are starting to warn that the current level of the market is unsustainable. Jeremy Grantham has talked of an ‘epic bubble’. Seth Klarman has noticed how investors are living under the impression that risk has ‘simply vanished’. Goldman Sachs has warned that a short-term correction is likely, even if it is quick to point out that this will probably be a buying opportunity for longer-term investors.
Markets are riding a wave of unprecedented liquidity, with fiscal and monetary policy teaming up to provide the biggest boost to asset prices for 70 years or more since they last worked together in the wake of the Second World War. There should be further news on that double act this week as the Federal Reserve concludes a two-day rate-setting meeting on Wednesday.
Absolute Strategy Research, a market analysis firm, has come up with a list of bubble indicators that it thinks make valid comparisons with the boom in Japanese equities in the 1980s, the dot.com bubble in the 1990s and the commodities boom in the noughties.
Common features include: low interest rates; high share valuations; bullish retail traders; and accelerating share prices gains as some of the hottest investments - think Tesla - turn left and head up the page in classic late bubble exponential rises.
ASR says that one in ten US stocks are now 40% above their 200 day moving averages. That is very rare. Only four times in the past 35 years has that been the case.
The FT is today reporting another measure of excess from the Bespoke Investment Group which it calls its ‘ludicrous index’. This is a measure of the number of companies listed in the US which have more than doubled in price over just the past three months and which are valued at more than 10 times their annual sales.
At the moment this index stands at 79 companies. Over the 10 years to last year’s market collapse the number was never higher than 13. But during the dot.com bubble 20 years ago it reached 120 companies.
At the moment whether or not we’re in a bubble is still a balanced debate because there are other investors who still think today’s prices are justified both by the changing corporate environment - tech stocks are structurally more profitable than they used to be - and the policy back drop which looks like continuing to be very supportive for the foreseeable future.
That’s why Goldman Sachs, for example, says any short-term correction would be an opportunity to top up on investments. It thinks we are in the early stages of a long-term bull market starting last March after the early pandemic market sell-off. It says the hope phase of the new cycle - when valuations rise sharply even as earnings are still falling - is now over. But it says the growth phase of the cycle - which can last much longer, fuelled as it is by real gains in earnings - is just beginning.
The threat to that thesis might be a significant deterioration in the pandemic backdrop if new variants turn out to be more dangerous and more transmissible than the original outbreak of Covid-19. This week, the list of gloomy voices was added to by hedge fund Element Capital, which warned that investors and policy makers are failing to understand how deeply the new variant of coronavirus will hit the European economy.
It says analysts need to revisit their forecasts for economic growth as the variant spreads and lockdowns extend for months beyond current estimates. At the moment there is widespread acceptance that the UK and Europe, and maybe the US too, faces a short-term technical recession in the final quarter of 2020 and first of 2021. But what if the economic slowdown extends into the second and third quarters too?
Meanwhile, in some ways it is back to business as normal while in others the world seems to have permanently changed in recent weeks. US politics is a mixture of both. Joe Biden has hit the ground running with a flurry of policy reversals and bold gestures. He rejoined the Paris agreement on climate change on day one and is pushing for a massive $1.9trn stimulus package including cheques for $1,400 to all adult Americans.
The permanent change is represented by the sheer scale of what he is proposing, which investors have identified as the trigger for a big rotation back into cyclical, value investments. The business as usual part of the equation is Republican resistance to the stimulus proposals. The fragility of the Democrat majority in the Senate is going to be put to the test in the coming months.
In the UK, things have clearly changed dramatically for certain parts of the economy thanks to the rupture with the rest of Europe at New Year. Brexit has barely featured in the news headlines as Covid and the US has grabbed everyone’s attention but news is starting to mount of delays, red tape and extra expense, especially for smaller businesses.
In one bizarre development over the weekend, it now looks as if the Government is tacitly advising small businesses to set up European subsidiaries in order to circumvent all the new form-filling and expense involved in trading with the continent post-Brexit. It is hard to see how investing in Europe and reducing the tax take here at home is what was intended by our new freedoms from EU bureaucracy.
So far, those straws in the wind have failed to dent the resurging fortunes of the pound, which has risen to around $1.37, its highest level since 2018 as investors have focused on Britain’s apparent lead in rolling out vaccinations and our perceived exposure to the benefits of opening up again thanks to our services focused economy.
Compared with the euro, the pound’s gains have been less obvious because the European single currency is also on a roll against the dollar. That reflects a growing view that the ECB is running out of weapons against disinflation in the region. Unwilling to go further into negative interest rate territory, the ECB disappointed investors last week with its cautious approach to further stimulus for the European economy. The euro has risen by nearly a tenth against the dollar in the past year.
In another sign of permanent change to the way we live our lives, the unstoppable shift away from the High Street and towards online shopping was highlighted by news that online fashion brand Boohoo has agreed to buy the Debenhams brands while steering clear of buying the company’s physical shops.
At the same time, Asos, another online retailer, said it was looking to buy the Topshop and Topman franchises that were part of the Arcadia empire put together by Philip Green. The deals are interesting because they point to other companies adopting the Amazon approach of creating a one-stop shopping environment, not just clothes but a mixture of fashion, beauty, sport and homewares. A kind of department store on the internet.
And finally, this week is extremely busy on the corporate front as the US earnings season gets into full swing. In focus this week are a string of high-profile technology stocks, with figures due from Apple, Facebook and Tesla.
Also in the spotlight will be a number of airlines and related stocks. Both Easyjet and Wizzair are reporting while we will also hear from Boeing. Demand for air travel has obviously been massively hard hit during the pandemic but it requires an act of faith to expect this summer not to also be badly affected unless lockdowns are reversed very soon.
On the healthcare front we will have results from Johnson & Johnson, Eli Lilly and Abbott Laboratories.