Finding equilibrium
During bull markets, asset prices typically rise but when sentiment changes there is invariably an overreaction. Many company directors are left scratching their heads because they see their business in good shape but the value on the stock market may have plummeted. Of course, this is the green light for management buy backs where executives buy more shares at much lower values. Fill your boots time if you have confidence in your business.
I was reading an article on Ft.com by Howard Marks the author of “why do we have cycles”. He asked the question “do you really believe that the value of some businesses have halved in the last 5 months or so?”
He went onto explain that the price of an asset is based on fundamentals and how people view those fundamentals. So, the change in an asset price is based on a change in fundamentals and/or a change in how people view those fundamentals. Attitudes regarding fundamentals are psychological/emotional and are capable of changing much faster and more dramatically than the fundamentals themselves.
Markets can be paranoid!
Overnight, the S&P 500, which has had a tough time so far this year, rose by 2%. This was based mainly on good news from retailers in the US. Yet, in the previous week, profit warnings from Target and Walmart spooked investors who begun to think that this was going to be the trend for most retailers.
However, Thursday’s news was very different as equities were buoyed by strong earnings. Discount stores Dollar Tree and Dollar General were amongst the biggest movers with their stocks rising by 22% and 14% respectively. Department store Macy’s, a more familiar name to us in the UK, saw on the back of its profit forecast its shares rising by 19%.
“The fact you get a major retailer telling a different story from what other retailers have told us helps calm people down a bit,” said Jim Paulsen, Chief Investment Strategist at The Leuthold Group.
A swallow doesn’t make a summer
The last five days have been positive for the main equity indices across western economies but volatility and uncertainty is still the name of the game.
The FTSE 100 at the time of writing (10am Friday 27th May) has risen by 1.51% over the last five days.
The FTSE 250 by 1.59%. The S&P 500 by 3.31%. The Dow Jones by 3.85%. The volatile Nasdaq by 1.72% (source FT.com).
Are bonds for turning?
Government bonds haven’t performed well in this inflationary environment, and we minimised our exposure, many months back. However, perhaps the tide is turning!
A Bloomberg gauge of confidence in long-term US government bonds is on course for a third consecutive weekly rise, gaining more than 4% since 6th May, a turnround echoed in European markets. Although the recovery remains modest compared with the scale of earlier declines (the index is more than 18% lower year-to-date) some investors sense a turning point for the heaviest global bond sell-off in decades.
“We have rarely been as bullish on government bonds as we are now,” said Mike Riddell, a Senior Portfolio Manager at Allianz Global Investors. “If growth slumps, then inflationary pressure will recede, and yields look more attractive than they have in a long time.”
Again, something we are keeping a close eye on. Falling bond yields will be good news for the value of bonds.
Enjoy the celebrations
Whatever your sentiments towards the royals there is no doubt that the Queen has done a sterling job representing the United Kingdom and her dedication is to be admired. Enjoy the celebrations next week in whatever guise they take for you.
I will miss the Bank Holiday as I will be in Singapore, before exploring two islands in Indonesia, then moving on for a few days to Dubai. My trip has been postponed for the previous two years, so hopefully we’ll get there this time. I’m partly looking forward to it and partly not because as many of you know, I don’t like flying. Got to suck it up and get on with it!
As next week is short, I’ve asked Gus (Andrew) to just write a brief note on Wednesday. Gus will be writing the weekly updates for the rest of June until my return.
All the very best
Gary and the Blue Sky Investment Team |