March 2020 will long be remembered as a month when information overload was tested beyond imagination. Embattled investors had to deal, not only with an imminent threat to life against themselves and their families, but also with violent liquidity and price collapses across asset classes, including even long bonds and gold.Diversification seemed momentarily to have failed. As it happens, it was also the perfect moment for me to start a new role as Investment Manager at EBI.Scanning through the market crashes of the past we see both uniqueness and commonalities. The 1973-4 crash left the US markets down around 45% and the UK down 67%. The 1987 stockmarket crash was over relatively quickly with a “V” shaped market and economic recovery. In 2000 the Technology, Media and Telecoms (TMT) bubble ended with a two-year blowout elongated by the events of 9/11. The Great Financial Crisis (GFC) of 2007 onwards was long drawn out with unprecedented levels of intervention led by Fed Chairman
The Coronavirus panic has changed quite a few things in its short life.We no longer stand within two metres of each other without being forcefully reminded to move apart, we no longer seem to mind washing our hands several times per hour or the restrictions being placed on our everyday lives in the name of “flattening the curve” , whilst governments across the world have awoken from their apparent apathetic attitude towards the economy’s performance. The latest US and UK stimulus packages, in addition to the usual Central Bank monetary responses, cutting rates, printing more money, provided banking system liquidity infusions, are now leading governments into the realm of fiscal policy or state spending; it is almost as if the Coronavirus has decided that we were to have a UK socialist government irrespective of the last election result.
Things are getting wilder by the day – it is said that markets stop panicking when Central Banks start panicking, and it appears that they have now done so. According to Goldman Sachs, there have been 14 days in the last 23 when the S&P 500 has moved up or down by more than 3%, the highest concentration since 2009. The moves in US equities for the last week have been, shall we say, unusual.12/3: Limit Down13/3: Limit Up16/3; Limit Down17/3: Limit Up18/3: Limit Down…
As unexpected shocks go, Coronavirus ranks in the very top tier of events capable of disconcerting investors, amongst the Great Financial Crisis (GFC) and Black Monday. Whilst news continues to horrify many investors with the human and economic implications, buried in the latest data in what statisticians refer to as “the inflection point of a logistics curve”, is a sign that the very worst may be over. February news was dominated by the global spread and impact of the Coronavirus (Covid-19). Dow Jones, S&P 500 and the FTSE All-Share fell by over 14%, 12% and 11%. So far in March (16th March 2020), these Index markets have been continuing their decline and the correction has now developed into a full-scale bear market.
Technology stocks are the top dogs of the stock market. For the last 6 months or so, they have risen almost without a pause and have become a greater and greater influence on the direction of the overall stock market. Last month, the big four MAGA stocks (Microsoft, Amazon, Google (Alphabet) and Apple) reached the point where they represented over 17% of the total S&P 500, and contributed almost 70% of the gains attributable to that Index in 2020 alone. How did they get this big and thus so influential on both the stock market and the wider economy? There was of course a lot of hard work, plus some innovative ideas, but they had a few advantages that were (mostly) unavailable to other firms. If you want to become a “tech titan”, some or all of the following tailwinds need to be behind you.
[This post is a follow-up to that of October 2019, in the light of further falls in interest rates; the message remains very much the same however: stick to the plan. Changing asset allocation in response to market movements remains fraught with danger. Stay diversified].
The information on this page is only intended for use by professional clients, regulated financial advisers and intermediaries who are knowledgeable and experienced in the financial services market and in investment products of this nature. It is not intended for retail investors. It has been an “interesting” week. In the space of just 6 trading days, the Dow Jones Index went from all-time highs to a “correction” (defined as a 10% fall from a high point). Reportedly, every continent on the globe is now infected (apart from Antarctica) and there have even been deaths in high political circles- for now in Iran, but other senior government personnel in other countries will inevitably follow, which may concentrate minds at decision-making level.
Returns to the Value factor continue to disappoint. Against Momentum it has been almost one-way traffic for the whole of 2020, whilst in the longer term, we are now approaching the low point (for Value relative to Growth) reached in 2000 as per the Russell 1000 Index. [The Russell 1000 Index represents the 1000 largest capitalisation firms in the US]. Brief spikes in Value (as seems to be happening currently) last only a few days, before the selling resumes anew.[Note: the chart below plots Value against Momentum, not growth; but a nearly all the highest momentum scoring shares ARE growth shares, they amount to one and the same]. In case there should be any doubt, it IS a global phenomenon; only US Value has beaten the MSCI World Index, and all major Value regions have even lagged long-dated UK Government bonds, which are a risk-free asset.
Harold Macmillan, the UK Prime Minister between 1957 and 1963 was reputed to have replied “events dear boy” when asked what the most likely thing would be to knock his government off course. With the increased focus on Sustainable and Socially Responsible investing it now seems that there is significant “event risk” involved in running a company in contravention of these principles and the bigger and more high profile it is, the more dangerous things can get. The world seems more than ever eager to take offense. What would once be dismissed as a joke or mild criticism is now portrayed as something akin to assault, regardless of the intent behind the statement. The resignation of Alastair Stewart in recent days as a result of a (somewhat concocted) row on Twitter with another user is but one in a long list of the famous who have been brought low by controversy.
EBI Portfolios adopt a buy and hold strategy, which means that one year performance is not a sound basis for decision-making with regard to asset allocation etc. However, we recognise that clients wish to know how their assets are performing and so a yearly review is undertaken to allow them to understand the sources of returns; it is not always possible to discern the rationale for why millions of investors (most of whom are much better informed than we are) do what they do, so any interpretations offered here are just that-interpretations- and may be in error. But taken as a rough guide, it may help investors to better understand how markets have performed in 2019. On the basis that any information is better than none at all, we offer the below.