Whilst the application of many millions of booster jabs have given a strong protection against the Omicron variant, offering the hope of COVID normalisation, global financial markets have not had a positive first few weeks of 2022.
The Week In Markets – 15 – 21 January
This week’s round-up starts with a brief history lesson. Studying the history of stock markets can be highly powerful and allow us to make more informed decisions, as opposed to reacting to emotions, which often get the better of us in times of market stress.
On Wednesday the US-focused, technology-heavy Nasdaq Index fell into correction territory – which is classified as a decline of more than 10% from its most recent peak (November 2021). This is obviously a painful experience, but it’s by no means the first time this has occurred, indeed since the index was launched in 1971 this is in fact the 66th time we have witnessed a correction. It also fell into correction territory in 2021 and twice in 2020. Looking all the way back to October 2008 and the financial crisis this is the 17th correction the index has experienced since then, in each of these instances the index has been higher 12 months after the correction (excluding the 2021 correction as we don’t yet have one year’s worth of data). While we cannot guarantee the index will again be higher in 12-months time, it does help provide a bit of balance to our natural emotions that focus on risk-aversion.
US earnings season posted a surprise this week with Netflix missing growth expectations. The stock was seen as a huge beneficiary of the pandemic as its subscriber base ballooned. However, with increased competition and a reopening of economies, new subscriptions have slowed. The share price fell close to 20% in after-hours trading. It’s another example of the reversion we are seeing in markets, out of previous winners, into more unloved areas of equity markets.
At a geopolitical level, the Russian-Ukrainian tensions continue to remain elevated. Comments from US President Biden this week did little to thaw the situation. The combination of geopolitical risk and inflationary concerns appeared to benefit gold, which has risen during the week.
Here in the UK the under-pressure Prime Minister announced that the Plan B measures that were put in place to tackle the Omicron variant would be withdrawn in England from 26th January and the guidance to work from home has ended.
Bright spots this week continue to come from the UK stock market, with the UK large-cap index bucking the trend of global peers and showing positive gains for the calendar year so far. UK equities have felt a lonely place to be invested over recent years but a combination of low relative valuations and high exposure to sectors that typically benefit from inflation (financials, miners) have helped the equity market. It’s a timely reminder that being diversified not only through asset class, but geography and investment style is important and something we continue to focus on. History has shown this focus on diversification to be a prudent long-term strategy and as Mark Twain said in 1903 “History doesn’t repeat itself, but it often rhymes”.
Andy Triggs | Head of Investments, Raymond James, Barbican
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
The Week In Markets – 8 January – 14 January
The third Monday of January, known as “Blue Monday”, is often regarded as the saddest day of the year. A combination of gloomy weather, Christmas credit card bills and waning New Year’s resolutions combine to leave people feeling low. One must wonder whether Boris Johnson experienced his own “Blue Monday” a little early this year, as he stood up in the House of Commons this week and admitted to attending the Downing Street party meeting on 20th May 2020. Pressure on the Prime Minister has increased dramatically and there is a genuine feeling that these alleged breaches of lockdown rules could topple him. This morning there have been further claims regarding two leaving parties held at 10 Downing Street on the eve of the Duke of Edinburgh’s funeral in April 2021.
With the political turmoil dominating UK tabloids, you will have likely missed the more positive news that the UK economy surpassed pre-COVID levels in November on the back of stronger growth data. There was also consensus beating construction, industrial and manufacturing data released on Friday and helped insulate the UK market from some of the volatility being witnessed in asset markets currently.
Comments from two US Fed Committee members this week provided mixed signals to markets. First, we had Fed Chair Jerome Powell speak on Tuesday, and his dovish language led to a sharp rebound in global equity markets. However, Lain Brainard stated on Thursday that fighting inflation was the Fed’s “most important task”. These comments, alongside inflation data coming in at 7% on Wednesday, led to another sell-off in equities. The areas of the market which continue to be hit hardest are the higher valued and speculative growth companies, many of which have experienced exceptional share price performance over the last few years. Tesla and Netflix fell 6.75% and 3.35% respectively on Thursday, dragging down US equity bourses.
At a country level the UK market, having lagged US and European counterparts since 2016 has bucked the trend and had a strong relative start to 2022. The UK has meaningful exposure to sectors such as banks, energy and mining which tend to perform well in inflationary environments. High-growth areas such as information technology make up only a small part of the UK market, whereas they represent close to a third of the US S&P 500 benchmark.
Commodity prices have been strong so far in 2022 and this week saw gold and oil push higher. They benefitted from a combination of inflationary pressures and a weaker US dollar, both of which typically support commodities.
In what was a busy week for news flow, there were geopolitical issues for investors to contend with as well. Concerns over a Russia-Ukraine war have escalated, and talks appear to have done little to help with Russian officials rejecting Western efforts to ease tensions.
Later today US Q4 earnings season will kick-off in earnest and will allow investors to focus on company fundamentals once more. Despite what has been a difficult 14 days for equity markets, there is consensus that the global economy will continue to grow and aggregate company earnings will also grow, which should support share prices. Over the short-term, there can be any number of factors that influence the daily moves in a company’s value, but if we take a longer-term time frame, fundamentals, such as a company’s earnings typically play a significant role in share price performance.
As always, we believe the best way to avoid feeling “blue” about markets is to take a long-term approach coupled with asset class diversification. In doing so you can even flip the mood on its head and see the recent asset market pullbacks as more attractive buying opportunities.
Andy Triggs | Head of Investments, Raymond James, Barbican
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
The Month In Markets – December 2021
The Month In Markets - December 2021
December is often a good month for stock markets, with the so-called Santa Rally delivering presents to shareholders the world over. However, Asian shares must have made the naughty list this time, as another month of losses capped a poor year for these markets. But western markets took part, as investors looked beyond the Omicron fears that wobbled markets late in November.
This extended a puzzling theme we’ve seen for the whole of last year. Few will remember 2021 positively, as the flow of news has felt relentlessly grim. And yet most stock markets have risen: The UK market is up by almost 20% over the last 12 months; while the global average, driven by a heavy weighting in runaway US shares, made 23% (its third straight year of double-digit returns). How can this be?
This being the complex world of financial markets, there’s no simple answer to that. Instead, there are several answers. And any one of them, or some of them, or all of them, may be true.
One aspect of markets’ behaviour that befuddles investors is that they often react to future events, not to events that have just happened. This makes them seem psychopathic: Bad news hits the papers, perhaps confirming we’re in a nasty recession, then markets rise – apparently rubbing their hands in glee, like a pre-spirits Ebenezer Scrooge.
But what they’re actually doing is reacting to the likely reaction to that news. Most probably that this bad news means future good news: That central banks will, in response, put their foot on the monetary accelerator, which will lead to higher profits and growth further down the line. What can make this especially tricky is that sometimes markets react to the perceived reaction to the likely reaction to that news – and so on – often many times removed. This can make the whole experience like working in a Christopher Nolan movie.
So, one explanation for the weirdly cheerful tone of stock markets is that they’re looking beyond the bleakness, to some future sunlit upland. Perhaps – dare we dream it – a time when COVID is, if not gone, then relegated to the status of seasonal flu. This makes the stock market seem less like a psychopath, and more like a relentlessly cheery doctor. Which, if nothing else, is at least a nicer simile to contemplate so early in your new year.
Under this scenario, markets aren’t nuts. They’re correctly anticipating that companies will continue to do well in the future. Particularly that America’s tech giants will carry on hoovering up market share. These companies have, for the most part, had a cracking 2021 and, given their enormous size and influence on the global stock market, they account for a significant part of those gains.
Another popular explanation for the incongruously good performance is that, in contrast to the first explanation, investors have lost their marbles. Maybe lockdown has caused collectively delusional behaviour, driving us into a bubble the likes of which we last saw in 1999. Backers of this explanation present several exhibits, including historically high valuations, the mania for cryptocurrencies, and bizarre market shenanigans like last year’s GameStop episode. None of these are easily dismissed.
A third explanation – that’s not unrelated to the first two – is that it’s all down to the actions of central banks. For years they’ve been creating money and using it to buy financial assets, all in the hope that it will keep the economy rolling. And, in their defence, that’s essentially what the economy has done, albeit perhaps not as emphatically and evenly as many would have liked.
They took this to another level in response to the pandemic, creating trillions, then trying to inject it into the real world by buying financial assets. Actions like this led to fears of runaway inflation after the financial crisis of 2008 and are causing similar angst today.
But, as one theory goes, perhaps that money is failing to make it into the real world and is, instead, snagged in the not-quite-real world of financial markets. This would explain why real-world inflation hasn’t materialised, but in the financial world of shares, bonds and property, we’ve seen prices inflate dramatically.
And that brings us back to last month. A month in which not only did we see share-price inflation, but also faster real-world inflation, and at a far higher level than we’ve been used to over the last ten years. It was also, not coincidentally, a month in which the strongest sections of the market were those that had been the weakest over that same ten-year period.
I’ll put this another way: Many of the last decade’s winners were the losers in December, and that was due to concerns over rising inflation. Given the margin of their previous victory, that hardly matters. But if it’s a small victory that’s repeated, month after month, over the next decade, then a portfolio built solely of previous winners will perform poorly (just as a portfolio of last decade’s losers will if it isn’t).
This is the conundrum we wrestle with as we position your portfolio. We don’t try to precisely predict which way the world will turn – that’s a fool’s errand. Instead, we try to remain balanced, and therefore less vulnerable to a one-sided view proving the wrong one. In investing as in life, it’s best to focus first on survival, and that remains our priority with your capital.
Simon Evan-Cook
(On Behalf of Raymond James Barbican)
Risk warning: Opinions constitute our judgement as of this date and are subject to change without warning. With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. Raymond James Investment Services Ltd nor any connect company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this article. Past performance is not a reliable indicator of future results.
The Week In Markets – 3 January – 7 January
The start of the year is often a time for new beginnings, with many of us setting resolutions for the year ahead. The history of this age-old ritual can be traced back some 4,000 years when the ancient Babylonians would make promises to their gods at the start of the new year (which was actually in March!). Today, these resolutions we make are not always to the gods, and evidence suggests we find it hard to stick to them, with most people giving up on their objectives within the first six weeks of the year.
The opening week in investment markets has been particularly volatile, and one must wonder what sort of New Year’s resolutions the US Fed made. The release of the Fed’s December meeting minutes highlighted that the members had become more concerned about the persistency and elevated levels of inflation and that “it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated”. The words were enough to send equity markets into a tailspin, with the US hit particularly hard this week. Markets such as the UK and Europe, which have lagged the US considerably over recent years, have outperformed this week. These markets have higher exposure to sectors such as energy, mining and financials which typically perform better in inflationary environments.
Tesla, one of the most heavily debated stocks in the investment community, caught the eye this week. It announced Q4 sales on Monday and beat expectations by around 40,000 vehicles. Interestingly the Tesla Model 3 was the second most popular new car in the UK last year, only to be outsold by the Vauxhall Corsa. The sales beat by Tesla was enough to send the share price up around 13% on the day, increasing Elon Musk’s net wealth by $32 billion on Monday. However, the auto-company was not immune from the week’s volatility, giving back most of Monday’s gains by Friday.
It wasn’t just equities that have had a difficult start to 2022, with bonds also selling off on the back of the meeting minutes. Investors have now priced in interest rates moving up quicker than previously anticipated and bond yields have risen accordingly. As investors, we have been trained that government bonds act as good diversifiers to equities and while this is true over the long-term, there can be shorter-term periods where the correlations between these assets’ breakdown.
Today’s US Non-Farm Payrolls data showed 199,000 jobs were added to the economy last month. The number was below expectations, with the rise of Omicron cases likely to have impacted the ability to hire in December. The US employment market remains healthy with job openings at elevated levels. Indeed, the US consumer enters 2022 in a very strong position, benefitting from high savings, strong house prices and rising wages.
The big falls this week in equity markets have largely occurred in the companies that have performed very strongly over recent years. It’s a reminder that we shouldn’t simply chase last year’s winners. There are a variety of studies that have shown chasing performance rarely works, although it is hard to avoid the behavioural pitfalls that so often draw us to these names. For us it is about balance, ensuring our research process captures more than just past performance. We must also be willing to make some difficult decisions and invest in areas of the market that have been weak but may offer exceptional value going forward. Volatility, while unsettling at times, can present investment opportunities for long-term investors, which we must not overlook.
As we head through the year it will be interesting to see if the markets apparent New Year’s resolution of rotating out of previous winners will last longer than six weeks.
Andy Triggs | Head of Investments, Raymond James, Barbican
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
2022 Outlook
Athletes at the Olympic Winter Games will either taste the thrill of victory or the agony of defeat. The same can be said for investors, as the easy victories over the last two years will become more challenging and hard fought in the year ahead.
The Week in Markets – 18 December – 25 December
The Santa Rally refers to the sometimes observed trend of equities rallying over the final weeks of December and into New Year. There are
various theories behind the drivers of this phenomenon; the investment of holiday bonuses, happiness on Wall St and the fact that institutional investors are often on holiday, meaning volumes are thin and retail investors dominate the market for the holiday period.
Whatever the drivers are, this December has been
disappointing, with hawkish central banks and the rise of Omicron leading to
increased volatility and lacklustre markets. The start to this week was bumpy
indeed, with equity markets selling off heavily on Monday, before bouncing back
strongly on Tuesday. This general whipsawing and lack of direction in equity bourses
has been witnessed over the course of December.
With a shortened week and the festive period approaching
economic data has been in short supply. On Monday we saw China cut its lending
benchmark loan prime rate, the first time it has done this since April 2020.
With Chinese economic growth slowing, the cut is aimed at spurring on the
economy and many strategists are predicting further cuts in 2022. This has
typically been a positive for both Chinese and global equities in general, with
the world’s second largest economy loosening conditions and likely improving
credit conditions.
The impact of rising cases of Omicron continues to be felt
both domestically and abroad. Rumours of further restrictions after Christmas
continue to gather pace which would cause increased pain for many businesses.
Rishi Sunak did announce a £1bn support package this week, which entitled
companies affected by Omicron to grants of up to £6,000.
With a handful of trading days remaining in 2021, there is
still chance for the Santa Rally to kick in and provide a positive end to what
has been a strong year for risk assets (equities). The drivers of equity returns
have predominantly been strong earnings growth, with valuations actually
falling in most developed markets. Many of the themes that occupied investors
thoughts in 2021 look like continuing into 2022, along with additional
considerations such as rising interest rates and tight labour markets. We will
continue to be nimble and agile in our approach, aiming to navigate some of the
challenges, while also aiming to exploit some of the undoubted opportunities
volatility will create.
We’d like to sign off by wishing you all a happy and healthy
festive period. Thank you to all our clients for supporting us since the launch
of Raymond James, Barbican. As a business, we’ve been truly humbled by the
support, and do not take it for granted. We all feel re-energised and very
excited about the future and look forward to seeing you all, hopefully in
person, in 2022.
Andy Triggs | Head of Investments, Raymond James, Barbican
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
The Week in Markets – 11 December – 17 December
The Bank of England (BoE) stole the headlines this week by modestly raising interest rates from 0.1% to 0.25%. It was the first rate increase in the UK for over three years and the BoE has become the first major central bank to act in an attempt to tackle rising inflation. For many this will feel like a big change and that the BoE are decoupling from the rest of the world, but when looking globally 2021 has been characterised by central banks increasing interest rates. Indeed, on Tuesday Chile increased its rates by 1.25%, which marked the 112th interest rate hike by global central banks this year.
Given the rise of Omicron and the expected short-term economic slowdown, the virus will cause the probability of the BoE’s move was only around 20%. As such we saw quite a reaction in both equity and currency markets, with bank shares rebounding and sterling strengthening against a basket of currencies on the back of the news. It’s clear the shift in policy by the BoE was driven by fears around inflation. This week we saw inflation hit a new 10-year high, reaching 5.1%, driven by fuel, energy and clothing. The BoE reported they expect the number to climb to 6% in the coming months, three times the official 2% target level.
The US Federal Reserve had met earlier in the week and although they didn’t change their interest rates, they did indicate that they would end their bond purchase programme by March and potentially increase rates up to three times next year. With above-trend growth, strong consumer and corporate balance sheets and supply-side issues, it is clear central banks are worried about economies overheating and inflation spiralling out of control.
The Omicron variant continues to spread rapidly with the UK recording a record number of cases throughout the week. Although positive cases are spiking, the booster programme roll-out has dramatically accelerated with over 745,000 boosters administered on Wednesday. The impact on global stock markets from the rise of Omicron has been largely muted, much different to the experience in Q1 2020. Markets believe a combination of vaccines, treatments, supportive government policy and healthy consumer balance sheets should support the economy in the short-term, a much different picture to all the uncertainty caused at the onset of the pandemic.
Economic data took a back seat this week. Here in the UK, retail sales rose 1.4% month-on-month, higher than expected, while Eurozone construction output also came in ahead of consensus.
Equity markets have generally lacked direction this week, with the rising threat of Omicron alongside higher inflation acting as a headwind. One asset that has recorded a better week is gold. It’s an asset we hold in portfolios, but which has been a frustration this year. It’s worth noting that it’s mainly held for its defensive characteristics and ability to diversify equity risk. However, if you study the drivers of the gold price, it typically performs well in a falling ‘real’ yield environment – something we have been experiencing for much of 2021, yet the gold price has barely reacted. We expect this to be a short-term breakdown in the trend as opposed to a fundamental change in the drivers of the precious metal and it will continue to be held in portfolios as a diversifying real asset.
While it was opportune to cover gold this week, we don’t expect anything to be happening in the week ahead that will mean myrrh or frankincense grab the headlines.
Andy Triggs | Head of Investments, Raymond James, Barbican
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
The Week in Markets – 4th December to 10th December
News from the UK dominated headlines this week, with Prime Minister Boris Johnson taking up column inches on a daily basis, covering suspected Christmas parties, the birth of another child and further restrictions placed on the country.
The apparent Christmas party scandal from 2020, which has only made its way to the public’s attention over the last week appears to have seriously dented the credibility of the Prime Minister and looks like a genuine threat to his position. This week saw Allegra Stratton, former Government adviser, resign following a leaked video. By Friday, the director of communications, Jack Doyle, was in the crosshairs, with rumours of his participation in the alleged Christmas party putting his job at risk. All in all, the incident(s) have done little for the stability of the Conservative Party and could potentially leave investors nervous about their UK allocations given the current fragility.
Alongside this scandal, the PM announced further restrictions on the country, given the growing concerns about the transmissibility of the Omicron variant. Despite the increase in restrictions, markets were robust, perhaps looking through the likely short-term nature of the measures. Indeed, the UK large cap equity index has risen around 2.5% this week, despite the challenges highlighted above. There was positive news for UK homeowners with Halifax house price data showing prices had increased at the fastest pace for 15 years over the past three months. Over three months to the end of November house prices had risen 3.4% and were 8.2% higher than 12 months ago. A robust housing market typically spills over into increasing consumer confidence and consumer spending, which benefits the real economy. A busy week for the UK was wrapped up on Friday with weaker than expected industrial and manufacturing production, which grew less than economists predicted.
When COVID-19 first emerged in 2020 it had a profound impact on the oil price, which fell significantly during the first few months of the year. However, the oil price is set for its best week since August with rises of around 7% over the last seven days. This is despite the rise of Omicron and the increase in restrictions that governments are placing on society. Sentiment has been buoyed by early indications that the severity of Omicron may be weaker than the Delta variant, while the longevity of measures, as this stage, is expected to be short. Investors are also mindful that OPEC+ will cut supply should Omicron concerns heighten.
A weekly round-up wouldn’t be complete without reference to inflation and the big news was saved for Friday afternoon; US inflation data came in at 6.8% year-on-year, a 39-year high. Breaking down the figures showed prices were rising across the board, including gas, food, new and used cars and housing (rents). The news will likely cement views that the US will raise interest rates in 2022 to attempt to keep inflation contained.
At a portfolio level, inflation can be tricky; high inflation is usually bad for traditional bonds, while it can negatively impact valuations of certain equity styles. We have tried to include assets in the portfolios that could, in theory, benefit, or at least not be worse off in inflationary times. Assets such as infrastructure, a physical asset, whose income streams are often inflation-linked, can perform well, while other real assets such as gold can be a store of value – both assets are held within our portfolios. While inflation seems to be in the spotlight now, we are aware of deflationary pressures that still exist, such as technology and demographics and factor this into our portfolio construction process as well, as always attempting to balance and mitigate risks.
Andy Triggs | Head of Investments, Raymond James, Barbican
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
The Month In Markets – November 2021
The Month In Markets - November 2021
We were on course for a decent November until Covid released Omicron; its latest update. Unsurprisingly, this caused stock markets to sell off, with money flowing into government bonds – which are perceived as a safe haven – instead. These movements, particularly the reactions from individual stocks and industries, provided an unwelcome reminder of the shock conditions we experienced in the first wave of Covid last year.
At the market level, it’s obvious why markets should take this news badly: If this variant were to resend us to square one in our fight against Covid, the return to rolling lockdowns would apply a heavy brake to economic activity and corporate profits. However, there are many unknowns about Omicron, which perhaps explains why the sell-off we’ve seen so far hasn’t been too severe.
These unknowns range from the grim back-to-square-one scenario outlined above, through the more neutral outcome of this variant being controllable through existing vaccines, to an outright positive result; that this more virulent strain turns out to be far less harmful than earlier variants. Positive because, as it passes through the population, it might act like a natural vaccine, giving us immunity against its more harmful predecessors. If this were the case, you could even imagine authorities compelling us to go out in the world to mix with other people. Good news for restaurants, nightclubs and cruise liners.
That last line hints at some of the market sub-trends that were revived this month. In our world of investing, never a day goes by without some comment on the tug-of-war between ‘value’ and ‘growth’. You’ll certainly hear us mention them in meetings with you, so a quick run-through might help.
The following is oversimplified to the point of being wrong, but to briefly explain: ‘Value’ is an investment approach that means buying companies that have become unpopular with the market, but the value investor thinks all that is about to change. If they’re right, share prices will bounce as the companies recover, or the market starts to like them again.
‘Growth’, in contrast, means buying a company that’s already growing its profits well, but that its proponents think will grow faster or further than others currently expect.
These two groups of stocks tend to move in herds, and each herd can have short, medium or long periods when it’s trouncing the other. Before the financial crisis, with a notable interlude for the late-nineties tech bubble, value had the upper hand. But the last decade was all about growth stocks: they consistently won.
And that was before the first Covid outbreak, which allowed growth to kick value when it was already lying prostrate on the canvas. The reason? The kind of out-of-favour stocks ‘value’ investors like had become cheap because they were mostly physical-world companies like retailers, airlines or oil companies. These had already been comprehensively outpaced by growth stocks, among which tech companies like Google, Facebook and Amazon were the obvious leaders.
So when Covid struck, forcing us off the roads and out of shops and airports, most value stocks took another hammering. While the fact we were all forced to spend more time in the digital world and had to do even more of our shopping online, gave ‘growthy’ tech companies a huge, unexpected windfall.
However, like a phoenix from the ashes (or a zombie from the grave, depending on which camp you’re in) value stocks were resurrected last November: The news of successful vaccine trials heralded the start of our return to the physical world, sparking a rally in value stocks that lasted for months.
It’s been a more even contest of late though, and although markets have generally continued to rise, they’ve see-sawed between value or growth along the way. However, this month, Omicron, and with it the threat of a return to lockdowns, hit value stocks hard again, while growth stocks held up better.
Until, that is, two days later, when the US Federal Reserve waded into the fray. Its chairman, Jerome Powell, stated their intention to taper the Fed’s Quantitative Easing (QE) program more swiftly than previously indicated. For reasons too lengthy to explain here, growth stocks have loved QE. As such, news that it’ll be disappearing more quickly was bad news for them. So, while the first leg down of the market on the 26th (see chart) was driven by value stocks, the second downdraft on the 30th (which carried on into December) was led by growth stocks.
So what we have here, in the space of just a week, is a microcosm of the big, conflicting forces that have been driving markets for years, and will likely continue to do so for some time to come. These really matter for the path of future returns generated by different investments, and therefore your wealth.
This is why we spend so long obsessing over them. Almost all of the assets that have performed well over the last decade have done so because they were well suited to the conditions we saw: Falling inflation, rolling QE and a movement-restricting pandemic. And because those assets have made great returns, it’s all too tempting to stick most of your money into them, as they look great on a glossy chart.
But clearly what matters now is the next decade, not the last one. And should that involve the opposite conditions: Rising inflation; an end to QE (then rising interest rates); and release from lockdowns, then there’s a good chance many of those winning assets will turn to losers (and vice versa).
The obvious solution is to work out what’s going to happen, and invest accordingly. But like many obvious solutions, it has a killer flaw: It requires a giant slice of luck, without which it’s impossible to forecast what economies and markets are going to do. And mistakenly believing you can predict them almost always ends in tears.
The honest and pragmatic answer is to stay well balanced. You’ll have heard us referring to both the growth and the value funds we hold. Our aim is to pick the best of both and therefore stay well clear of the worst of either.
This is a topic we’ll return to in future notes: It’s important that you understand our approach here. Our philosophy is that to aim for a good result with no risk of ruin is preferable to a stunning outcome achieved only by risking it all. Knowing you as we do, we think this is the right path to travel.
Simon Evan-Cook
(On Behalf of Raymond James Barbican)
Risk warning: Opinions constitute our judgement as of this date and are subject to change without warning. With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. Raymond James Investment Services Ltd nor any connect company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this article. Past performance is not a reliable indicator of future results.