In this week’s market update: a year on from the pandemic low; Deliveroo IPO highlights one of the Covid winners; and a busy week on the economic data front
It was exactly a year ago today that the stock market hit its low point following last spring’s rapid-fire bear market, one of the quickest falls of 20% or more in market history.
Of course, that is only clear with hindsight. At the time, few investors would have felt remotely confident that the moment had arrived to turn bullish on the market. March 23rd was also the first day of Britain’s national lockdown.
At times like these investors have to switch off the emotional side of their brain and focus instead on what the numbers are telling them. That is a great deal easier to say, with the comfortable benefit of hindsight, than it is to do in real time.
One year ago, 98% of the shares in the S&P 500 index were trading below their average of the previous 50 days. This is a measure that technical analysts use to indicate the breadth of a market move. 98% above or below the 50-day moving average is extremely rare and is usually a good signal that investors have become too negative whatever the headlines happen to be saying at the time.
Sure enough the moving average statistic was ringing a bell to mark the bottom of the market for anyone brave enough to hear it. Two months later on 27th May, 94% of S&P stocks were above their 50-day moving average. The tide had turned.
And the good news has continue throughout the past year. That S&P 500 has risen by 75% over the 12 month period making it one of the strongest one year bull markets in history. But if you look at the equal-weighted version which counts the performance of smaller companies in the index as much as the biggest ones then the performance is even better - up 95% year on year.
We know why the market has performed so well. Unprecedented stimulus by both the government and the central bank has been a great reminder of the old market adage, never bet against the Fed. The more or less unlimited resources of the financial authorities when they have the ability to print their own money means they are only restrained by one thing - the fear of inflation.
The best measure of that concern is the yield demanded by investors to invest in government bonds. The greater the fear of inflation the higher the yield required to compensate for the prospect of lower purchasing power in future. No surprise then that the yield on 10-year Treasury bonds has risen from a low of 0.3% last spring to 1.75% today.
It is this resetting of inflation expectations that is reminding investors of the so-called Taper Tantrum of 2013 when there was last a big rise in yields - a near doubling from 1.6% to 3.0%. The good news is that this time around rising inflation expectations mean that the real, inflation-adjusted bond yield has risen much less than it did eight years ago. It is the real yield which investors really focus on.
The other important thing to focus on is the relationship between bond yields and the interest rates set by the Federal Reserve. If the Fed can persuade investors that it is serious about keeping rates lower for longer then the rise in bond yields could run out of steam as investors are tempted back in to benefit from their relatively attractive yield (compared to what they could earn from cash). It’s a king of game of chicken between the so-called bond vigilantes and the Fed.
This week should provide us with some insight into who is winning that battle. First of all, we get inflation data on both sides of the Atlantic. That will tell us whether the bond market is right to worry or overdoing it a bit. We’ve also got some important testimony in Congress by Fed chair Jay Powell and his predecessor Janet Yellen, now at the Treasury.
While all this sounds a bit technical and only of concern to bond investors, it is not. That is because one of the most influential corners of the stock market, the technology sector, has been a major beneficiary of low interest rates and has wobbled recently on fears that rates may in due course have to be pushed higher to control inflation.
What we have seen recently is a correlation between the stock and bond markets - both have fallen together - which is quite unusual and unhelpful to investors who have constructed a balanced portfolio of bonds and equities precisely to protect themselves from market volatility.
As it stands, investors remain pretty optimistic. According to recent data from Goldman Sachs, investors have poured almost $170bn into equity funds over the past month as the focus remains on a brighter economic outlook, the roll-out of vaccinations (in the UK and US anyway) and ongoing stimulus.
Last week’s $68bn inflow was the largest on record, reflecting in part the first stimulus cheques to individual households, part of President Joe Biden’s $1.9trn package of support. Some of those payments are expected to find their way into the financial markets as the indiscriminate nature of the package means many people in receipt of the cheques are not strictly speaking in need of the money and will look to put it to work in what everyone can see has been a booming stock market.
Another indicator that there have been clear winners as well as losers from the economic disruption of the past year is the flotation of Deliveroo, the food delivery service, which this week said it was looking to achieve a nearly £9bn valuation in what will be London’s biggest IPO in a decade since Glencore came to market in 2011.
The announcement of the price range coincided with confirmation that the company has had a strong start to the year with transactions on its platform running at twice the level of a year ago. As well as the inflation data this week, there is a string of other economic announcements to keep an eye on. Perhaps most important are the Purchasing Managers Index numbers which give an indication of business confidence. The Eurozone figures in particular will be in focus as the region continues to struggle with rising Covid infection rates and new lockdowns. The PMI for services in the Eurozone is expected to remain below the 50 level which separates growth from contraction.
The Covid challenge in Europe is starting to spill over into our own domestic market as the important summer holiday season approaches and the government starts to warn us that trips abroad cannot be counted on this year due to the risk of re-importing the virus despite our more successful vaccine roll-out. Airline stocks were hit hard this week after weekend reports that the end might not be quite in sight just yet.
Here in the UK, we also have retail sales data and jobs numbers so by the end of the week the recovery picture should be quite a bit clearer.
Uncertainty over that recovery picture is showing up in the oil market too this week. After a strong rally which has seen the price of crude rise 60% since November, the cost of Brent crude fell by 7% last week to $64.53 as investors decided the price had got ahead of itself. Others believe this pause for breath is only temporary with demand expected to rebound this year despite short-term issues in rolling out vaccines in Europe.
Meanwhile, here in the UK the nagging worry that someone is actually going to have to pay for all the government’s generosity during the pandemic is back in focus this week. Today is the Treasury’s first Tax Day, a follow up to the Budget in which the Chancellor is expected to unveil the ways in which he is thinking of closing the fiscal gap.
A range of consultations is expected to be announced on a range of subjects that people won’t care much about like the nitty gritty of HMRC administration to things that they very much will care about like the future of Capital Gains Tax and the treatment of pension contributions. Unlike a Budget which can be long on flashy gimmicks and short on substance, Tax Day may actually have a much longer impact on our finances.