Last week was the anniversary of the 2020 market low

The Week That Was

Last week was the anniversary of the 2020 market low and it appears it is true what they say about markets being forward looking. The market’s COVID crisis ended on the 23rd of March 2020 and then the US market was up some 80% over the next 365 days as the COVID crisis got worse and worse for the global economy and the global population. This is of historical interests as we think you probably have to go back to the 1930’s to witness that kind of a market rebound. For retail investors this may pass unnoticed, but what many investors will see in their quarterly investment updates in the next few weeks (barring a market crash in the first few days of this week) will be a 50% rise (markets were up 20% after the Fed intervened in just the last week March 2020). That could very much look like the early cycle take-off rallies of 1983 and 2010. Except in both those cases the market was coming off extreme lows and looked very cheap, which is more difficult to argue now. Although the Australian market has trailed quite significantly, it also now trades on a lower multiple than the US. Overall, though markets, and especially the US, are starting this cycle (if that’s what it is) at a much more expensive starting point than in the early 80’s or 2010. Higher interest rates would make this disconnect even more striking as low interest rates are the only thing that could make markets look like ‘fair value’.

More and more the market is obsessing about the long-term interest rate and the inflation outlook so when last week ended with long rates down slightly across the board markets bounced. That meant it was another fairly good week for markets with every market and region up 1-2% with growth/tech stocks trading in a 4% range and value/industrial stocks trading in 2% range but ending up around the same amount. The zeitgeist in markets this year and probably looking forward until something changes is that value stocks are heading upwards as the vaccine/economic outlook improves and tech/growth stocks are the lightning rod for interest rate outlook volatility. Interestingly, the biggest single negative for world markets was the 50% decline in the share price of ViacomCBS, a (now) US$30bn cable and wannabe streaming player. This ties together a few current themes in markets as the stock had doubled in the last 2 months for little discernible cause, apart from maybe the interest it had attracted form retail investors. On Friday rumours swirled of a hedge fund that had been forced to liquidate over US$10bn in one day including holdings of Viacom and other US media and Chinese tech stocks. Fizzy tech stocks, retail market squeezes, over-leveraged hedge funds getting in on the act. Again, this all feels like late rather than early cycle market dynamics.

In Australia tech stocks like Afterpay and Appen also weighed on index returns but this was more than countered by strong performance from the Healthcare sector. CSL benefited from the announcement that the Astra Zeneca vaccine, which it is manufacturing, has finally been approved for use in Australia.

Fixed income government bonds rallied slightly during the week while most commodities were more or less flat. The gap between Australian and US government bond yields narrowed again last week and are now pretty much level pegging. This was mainly driven by an increase in long-term inflation expectations in the US (now around 2.6%) against a slight decrease here (now at just under 2%). While we may feel that the Australian Government’s stimulus program has been quite generous it pales into insignificance alongside that of the US. At least the RBA will be happy enough that our currency remains in check, having depreciated almost 2% against the greenback last week.

The Week Ahead

We will be watching:

• We seem to have a lull in manager meetings which will give us some thinking time ahead of our 1st quarter Market Dashboard update. Having just spent a fair bit of time with many equity managers and gathered quite a lot of holdings data, we will be extending our efforts to apply the dashboard return forecasting methodology to individual portfolios. It is a particularly interesting time to be doing that given the economic turning point we appear to be in the middle of and the extreme V shape we have seen in earnings and stock prices. These huge differences in the P and the E of the price earnings ratio means that we are seeing some interesting anomalies that require some interpretation and may be offering opportunities. For instance, the UK market is trading on 75 times trailing (2020 earnings) and just 13 times estimated 2021 earnings.
• We will also be focusing even more on our investment communications strategy. Not only is it, we think, especially important to cut through the noise mentioned above but the extreme price changes between different sectors over the last year. This last point means that we can expect many fund managers with a given position vis a vis the market to have outperformed, and underperformed by much wider margins and often for fairly random reasons. This is a perfect environment for retail investors to be tempted in and out of investment products for not always the right reasons and 2021 may prove to be a year where the value of sensible advice is heightened.  
• In the nearer term we will also be keeping an ear on the ground and be looking out for the technical/liquidity rumblings we heard emanating from the hedge fund industry at the end of the last week. Hopefully, those affected have got their house in order over the weekend