Markets were up by 1-2% around the world

The Week That Was

On the surface (at a country level) markets were fairly calm last week and markets were up by 1-2% around the world as Biden’s inauguration passed peacefully and his stimulus plans started take shape. Below the surface (looking at underlying sectors) things were much more interesting and as we have come to expect recently the real story was about value vs growth and sentiment. World growth indices were up 4% while value stocks were flat. Tech was the epicentre of the positive sentiment with Apple and Microsoft surging 9% and 6% respectively for reasons that are quite difficult to discern (they have provided no guidance and the market had appeared to have already priced in a fairly lofty earnings expectations for next week's results (as revenue is expected to hit a record $100bn for the last quarter). Other so-called FAANG stocks like Netflix, Google and Facebook were also up strongly ahead their results announcements next week. Even more fascinating was the intersection of this sentiment with known fundamentals. For instance, at the other end of the spectrum banks, including JP Morgan, Citigroup Bank of America and Morgan Stanley, all released results that were well ahead of similarly optimistic expectations in the past week. They have all fallen by 5-10% since they announced their results, admittedly having had a great run over the last three months. Talk about ‘buy the rumour, sell the fact’. At the end of the day this was more about sentiment and a pause in the ‘Reflation’ trade which has been so dominant recently and predictably energy stocks were also down.

With the local earnings season not starting in earnest until mid-February it was quieter in Australia, at least amongst the largest stocks as the miners and banks were essentially flat and range bound. Overall though the rest of the market had a good week with healthcare (mainly CSL) bouncing while local tech stocks like Afterpay and Wisetech enjoyed the bullish mood surrounding tech stocks globally. However, the biggest contributors overall were locally focused consumer discretionary stocks such as Wesfarmers, Aristocrat Leisure, Dominos and Tabcorp which may owe something to the lack of locally transmitted COVID cases across the country last week.

Bond markets were also reasonably calm with local government bond yields here and in the US oscillating in a 0.06% range and remaining just above 1% (through even that tiny variance has become somewhat significant in the pressure cooker low-rate environment that we now find ourselves in). That left government bond prices down slightly while corporate credit made modest gains.

Amongst commodity markets the only significant move was downwards for most soft commodities with wheat, corn and soy beans down 5%, 6% and 9% respectively, having risen 15%, 30% and 40% over the last year. With most of the rise having occurred since September, this perhaps underscores the point that in the last week we have seen at least a pause in the ‘reflation trade’. Well, that may explain the cyclical and industrial side of things but for growth stocks it is anyone's guess.

The Week Ahead

We will be watching:

• While we were always going to pay more attention to this US earnings season, with only 43 companies in the S&P 500 having reported we didn’t expect it to be quite this interesting this early on. Voyeuristically next week’s FAANG results and the market reaction will no doubt be interesting (even or especially if nothing of note happens) but more fundamentally the shape of the  recovery (the corporate part) should become clearer as we get a better glimpse behind the ‘corporate veil’.   
• It has been easy to dismiss the Robinhood/daytrader phenomenon as a potential sideshow given the relatively low volume of retail trading compared to institutions but as we hear more reports of increasing retail volumes and in particularly retail speculation through call options (which have a magnifying impact). Some of it is eye popping. We will be trying to calibrate this a little more while considering whether it is an opportunity or a threat for institutional investing or perhaps a canary in the coal mine.
• Not just in markets but amongst the investors and economists we talk to inflation expectations are now unusually polarised between ‘2010 redux’ (‘we’ve heard this before, the debt and deflationary forces remain to strong for structural inflation’) to ‘outright printing of money and impaired supply chains make this time different (or the same as before the GFC and maybe even the 70’s)'. Hunt Economics published some interesting observations on inflation now appearing in the US supply chain and we will be sure to bring it up in the podcast we will do with him this coming week. This is another of the big issues for 2021 and we may find that markets and economies have different needs and concerns.