We are in what I call an ‘everything bubble’. The valuation of Tesla alone is eye popping- a company with no cash. This is a great example of investor fear of missing out (FOMO). Having witnessed the dramatic flow into ETFs by all types of market participants is fascinating, as they effectively push up already over priced securities creating a wide divergence in stock valuations (ie versus those not included in index relocators) and thus creating opportunities for active managers. ETFs and index assets hit $6tr exceeding assets managed by active managers for the first time ever.
Textbooks are having to be rewritten as they incorporate negative interest rates and how they can potentially be used to drive growth… albeit this is yet to be seen as an actual outcome. What is sure however is that this drives zombification of companies who are able to access cheap liquidity, many of which will be held within ETFs. Don’t get me wrong, I think there is a time and a place for ETFs and a good portfolio manager will utilise these as part of his tool kit, however when 15% of the S&P 500 gains in 2019 was driven by Apple and Microsoft alone and the 10 biggest S&P gainers comprised 1/3 of the uplift, use of alternative tools might be more prudent at this point. This also highlights the lack of breadth in the market – ie concentration around a handful of names.
CNN’s greed fear index recently pointed to extreme optimism, which for me is a red flag. As Graham & Dodd stated: in the short term the market is a voting system and in the longer term a weighing machine – ie stocks short term are a popularity contest with the latest fads being en vogue (Tesla), but longer term, investor psychology is less of a factor and fundamentals matter.
Coronavirus has added a new and worrying dimension for investors and communities. Whilst the widely publicised view of eating bat soup was the original cause, there are rumours of a mishap at the Wuhun Virus facility which had been testing bat immune systems to strains of different viruses. The impact from a market angle has been a pullback in international stocks and specifically Chinese consumer stocks such as luxury brands and tourism. Market commentators are expecting a limited impact on global growth, which I also expect, but to put things into perspective, versus the SARS pandemic in 2003, which is estimated to have provoked a global economic loss of $40b and 0.1% hit on global GDP, China now accounts for 16% of global GDP as opposed 4% in 2003 and a third of global growth comes from China.
Trump season 2 will start to take centre stage and the associated drama will keep journalists transfixed. When (not if ) Trump gets reelected, we can expect even punchier legislations, and execution of executive powers without the need for congressional acceptance. This will translate into increased market volatility and a resurgence in political populism. My mantra has always been to look past the noise as it’s easy to get caught up here.
Bonds are telling an interesting sceptic story at the moment and seemingly less convinced around policy maker action / narrative. As Powell stated in the recent Fed statement, the economy is ‘in a good place’, whilst household spending has been downgraded from ‘strong’ to ‘moderate’ Note that the US consumer accounts for around 70% of US GDP so this is an important change in tone. Having a combination of cash, from taking profits in growth stocks, long bond duration exposure, and some dollar exposure would be a prudent allocation at this point of investor exuberance.
This year’s overarching market theme will be the hunt for yield and expect investor flows to chase that elusive 5% yield. Russell Napier, the economic historian stated that ‘the most dangerous form of speculation is the reach for yield…..everyone believes they have a moral right to 5% yield, if they cant get a high quality security, they will try to find it in a low quality security.’
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