Weekly Market Update - 08/06/2021
The week that was
Had we written this on Friday night in Australia we would have written about a fairly boring week in markets with value stocks remaining steady and tech stocks sliding a few percent The bizarre rise of some small cap US meme stocks, notably USA cinema chain AMC, providing the only real excitement. However, ‘Jobs Friday’ was always likely to stir things up and in the last few hours of trading in the US we saw interest rate expectations fall sharply and tech stocks stage a full recovery. The monthly jobs data is keenly watched at the moment as the US Fed has telegraphed that 1) it will be reactive (its long-standing modus operandi was to act preemptively to head-off inflation) and 2) it will wait for multiple jobs reports that showing that employment in the weakest areas of the US is reaching pre-COVID levels before reacting. In practice this will mean they will talk about tapering quantitative easing measures and ‘talk about talking about’ raising interests rates from zero). This job report showed falling unemployment but also less job creation than expected. So while the market had been fretting about apparent job shortages in the hottest areas of the reopening economy this shifts the focus to the apparently uneven nature of the recovery and suggest that the Fed will be happy to ‘run the economy hot’ until everyone catches up.
For now this is a very comfortable place for financial markets as company profits are booming and interest rates are likely to stay lower than they otherwise would do. It also underscores how dependent valuations of tech and growth stock are on low interest rates. At a sector level that also meant that most global sectors were up slightly for the week having traded in 2-3% range but the stand-out performer was energy. Oil hit $70 dollars mid-week, its highest level in 2 years, as OPEC and other oil producing countries boosted production but also forecast higher demand. This rubbed off on other commodities with all but gold, silver and copper up strongly. Iron-ore in particular was up another 10%, defying peak iron ore sceptics.
That was one of the reasons that the ASX was amongst the best performing markets last week (up by 2%) along with Brazil (up by 6%). However, it was again the banks that made the biggest contribution, given their weight in the index, with solid gains of 1-2% across the majors. Utilities advanced the most while IT stocks lagged. One other bright spot was Chinese tech stocks which rebounded last week, having been under the cloud of increasing scrutiny form Chinese regulators in the last few months. Many fund managers now see these stocks as fundamentally very cheap compared to US counterparts, if you can get past the regulatory risks and question marks over governance.
What we'll be watching this week
Our recently long-term forecast details three long-term scenarios (outright Inflation, Reflation and Disinflation) and 3 short-term pathways to positive or more ‘normal’ levels of real (after inflation) interest rates. We will continue to keep an eye on this over the next few months but for now it kooks like rates are heading deeper into negative territory as long-term bond rates fall and inflation expectations continue to rise. Arguably the only benign exit from this situation involves the practical application of Modern Monetary Theory (MMT) and we continue to carefully assess the validity of this as a solution to the moribund growth of the last decade, as well as the risks surrounding it.
We also continue to hoover up any ground level information on inflation that we can through the network of fund managers that we talk to. Last week it was a familiar story from all the equity managers that we met with - companies report widespread inflationary pressures here and abroad and not all of it is likely to dissipate as supply chains open up. As the late Milton Friedman might have said - it appears that ‘inflation everywhere and always is the final arbiter of real interest rates’. If or when we ever do find some conviction in where inflation is heading it will define the most important investment decisions that we will all have to make - growth vs defensive, value vs growth and credit vs cash.
Lastly, Environmental, Social and Governance considerations continue to pervade financial markets, while clients appear increasingly interested in reconciling their values with their investments. We have explored the intersection between valuation and ESG as well as thematic trends like digitisation. This is based on some analysis we did for a client last week in response to a query they had about adding more ESG and tech exposure to their portfolio. As ESG stocks become more popular we think ‘doing the work’ on valuation will become more important if ethical and total return objectives are to be reconciled. Equally, the pull-back in tech stocks may now mean that, certainly in an ultra-low interest MMT world at least, tech stocks could be looking like better value now. So we have to keep an open mind there even as we lean into the value/reflation thematic.
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