Modest losses from the tech and energy sectors were offset by gains in healthcare and materials. 27 April 2021

The week that was

If the consistent, incremental, and broadly shared gains of the first three weeks of April were about increasing confidence and a maturing reflation trade, last week was when a few cracks started appearing in the narrative. What if the Bidenomic infrastructure plan is a little flakey in parts (‘social infrastructure’). Maybe having a plan is not the same as getting it legislated with the narrowest of majorities. What are the costs and tax implications of such a plan (the US market tanked on Thursday on rumors that the Biden administration was about to double capital gains taxes for wealthy individuals)? When we decide to take out a car loan we do so with a sense of optimism, but then we reflect on the drag that decision might have on our future consumption opportunities. Last week the market might have had a few second thoughts, but it was more pause for thought than a capitulation and most markets were flat to slightly down for the week. Other opposing forces included US earnings results (strong and ahead of estimates) and encouraging jobs data were juxtaposed against terrible virus data, notably from India, and ominous news of worrying ‘double mutations'. More than all of that was perhaps the sense that increasingly frothy markets were due to a blow-off and Bitcoin (increasingly a risk barometer rather than an alternative store of defensive value) was down almost 20% during the week.

Here and abroad modest losses from tech and energy stocks were offset by gains from healthcare and (for Australia) Materials stocks. While iron ore prices led the commodity complex (rising 5% during the week) commodities, in general, were a sea of green indicating that that part of the reflation trade remains very much alive and well. Overall though there was not that much going on last week with value and growth stocks now trading more or less in line with each other. So, we had to dig around for something of interest and the lack of breadth in the US markets was really all we came up with. Specifically, most small, and micro-cap stocks in both the Nasdaq (tech) and Russel 1000 indices are down for the last few weeks are below their 50-day average while the majority of the S&P 500 remains well ahead. It is early days but the extent of the divergence in that statistic has been quite notable and points to some crowding into well-known US stocks. Elsewhere in the world, the differences in performance by company size were less notable although Emerging market companies also under performed.

Government bond yields firmed very slightly but prices were basically flat and high yield credit spreads eased ever so slightly. Again, nothing really to write home about (or in a weekly newsletter) but maybe worth keeping an eye on given how quiet credit markets have been.

What we'll be watching this week

·        For now, the market has not been presented with any data that would have a bearing on the persistent versus short-term spike in inflation data but much of the market chatter is about fairly full valuations in most markets (apart from of course the UK). Much of the polemic also focuses on simultaneous insider selling by listed company executives and record buying (with leverage) of retail investors. This perhaps speaks to the lack of breadth recently in markets outside large well-known stocks and is another reason to be on our toes and keeping an eye on the more technical trends happening within the mainstream indices. In particular, we shall be reaching out to a couple of the global small companies’ specialists to talk to in the next few weeks.

·        If we were looking for another catalyst then geopolitics and the fact that sensible sources are putting out more serious, if speculative, commentary on the possibility of the annexation of Taiwan by China. It still sounds like a fairly remote possibility but it if happened it is likely that something that would not be telegraphed. This is, in our view a small probability but high impact event, rumors of which market would react badly to.