Pay attention – we are in the middle of a historically significant event There is an old proverb, “May you live in interesting times”. This is falsely attributed to an English translation of a Chinese curse. The closest Chinese comparison to this saying is, “Better to be a dog in times of tranquillity, than a human in times of chaos“. Either way, there is no arguing that we do indeed live in interesting times. Since the start of the year, the world has changed in meaningful ways. We will focus below on the market related changes. Firstly, global share markets dropped 30% in March from their previous highs, wiping off US$30 trillion (30%) in value. Markets have since recovered to be only c.9% down from the previous high, as at the end of August 2020. World vs. US share markets Source: The Daily Shot In the US, we have seen share markets recover all their losses, now trading back at their historically record high valuations. Indeed, the US sharemarkets have now priced in the very unlikely “V-shaped” economic recovery, suggesting […]
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The markets appear fully recovered, but looks can be deceiving If you are watching the S&P500 you will know that as at the end of July, it was approximately 4% off its pre-Covid mid-February highs. If we dig a bit deeper however the index starts to tell a very different story. As at late-July, 186 of the S&P500 stocks, or 37% were showing a gain. The remaining 64% were still showing a loss since the start of the year. Delving deeper still we see that 226 or almost half of the S&P500 are still down at least 10% since the start of the year. Facebook, Amazon, Apple, Netflix, Google, Alphabet, and Microsoft (the FAANGM’s) currently make up 25% of the total S&P500 market cap. Put another way, seven stocks equate to a quarter of the 500-stock index. This is up from c.8% on mid-2013. The rally we have seen in these tech stocks has had a larger impact on the index’s performance, making it appear as if the US share market has recovered. S&P Mega-cap growth vs “the rest” Mega […]
Markets continue to defy gravity As US and NZ share markets test new highs the data from around the world keeps getting worse. Later in this month’s discussion we will make a case for why share values may not be as overpriced as we all believe, but first let’s review the worsening news. US Covid cases on the rise again As President Trump continues to understate the rising risks of Covid infections in the US and States continue to attempt reopening to get some semblance of growth back in the economy, the daily new cases in the US continue to rise. Doctor Anthony Fauci met with Congress in late-June to confirm that he was seeing a “disturbing surge” in infections in some parts of the country as some Americans ignored social distancing rules and States reopened without adequate plans for testing and tracing contacts. The 7-day moving average daily new cases for the US has continued to push higher into the end of June. This is not a second wave for the US but a continuation of the first wave. […]
Things don’t look better, just less bad Less Bad No.1 At the start of this pandemic, governments around the world were relying on data out of China to determine the infection and fatality rates for Covid-19 and reacted accordingly. There was a high level of uncertainty and assumed high infection/fatality rates across a limited sample size, which did not allow for many different factors across nations such as smokers vs. non-smokers, health systems, living conditions demographics, etc. As more data has been collated, the Infection Fatality Rate (IFR) has consistently dropped. Initially, it was thought the virus had an IFR of around 3.30% of those infected. This has most recently been reduced to 0.82%. Even this lower number is expected to be overstating the IFR given many of those infected may not have even been tested or shown symptoms. Infection Fatality Rates Early China report vs. US recent data Less Bad No.2 In early-March we saw the risk-free rates (government bond yields) and spreads (margin above the risk-free rate) increase to levels last seen in the 2008 Global Financial Crisis […]
What are we watching for? Below we have discussed several different signals that the PWA Investment Committee are monitoring to identify a suitable time to start increasing the allocation to bonds and shares as we progress through this market correction. What sort of market cycle is this? There are many letters being thrown around as to how this market cycle will play out. A “V” recovery means a sharp sell-off and an equally sharp share recovery (as seen in the 1987 stock market crash). A “U” shaped recovery means a deeper and lower for longer bottom (as seen in the 1930’s stock market crash). A “W” sharped recovery means the market has a recovery before another correction and then a further recovery (as in the 1966 market correction). In considering which cycle we might be in we must look to what is causing the correction and how the central banks and governments are responding. Quite clearly the response to shut down economies to limit the spread of Covid-19 is the reason for the sell off. This in turn is impacting […]
2019 – Another year of growth underwritten by Central banks You may recall at the end of 2018 we saw a large correction down in the S&P500 of around -20% as investors in US shares sold out on fear of rising rates and slowing growth. Enter the US Federal Reserve with a change in monetary policy from tightening (raising rates) to loosening policy (dropping rates). Interest rates in US and around the globe fell, however the world continued to slow with the global Purchasing Manager Index (PMI) moving into negative territory around the world. This caused share markets in most developed economies to move sideways on the uncertainty around whether we would see the US China trade war leading to the developed economies moving into recession. Economists were forecasting that in August 2019 Quantitative Easing would end with a net $10 billion per month being removed from the markets. As the world continued to slow however Central Banks again rode to the rescue and the QE forecast changed with November 2019 forecast US$100 billion per month being pumped into the […]
Share market review Over the past 12-months most share markets have produced positive returns with only the Japanese Nikkei index producing a negative return in local currency. The remainder have produced low single digit positive performance except for the NZX and ASX which have produced attractive double digit returns. As shown above the NZX50 has had a solid 12-month performance. This rally has occurred on the back of slowing local and global markets, which has led to falling local interest rates, and an increased level of foreign ownership (53.7%). These two factors have driven the NZX50 to record high price to earnings (P/E) levels, with the NZX50 now trading at a record 30.1X. As the global economies have continued to slow, we have seen a steady reduction in NZ Gross Domestic Product (GDP) from 3.1% y.o.y in June 2017 to 2.1% y.o.y June 2019. NZ GDP may slow further into the end of 2019 unless we see a meaningful turnaround from our trading partners. NZ economy & interest rates Reserve Bank Governor Adrian Orr cut the NZ Official Cash […]
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