Monthly commentary

It is easy enough to find quotes from ‘experts’ suggesting that stock markets have gone mad. Indeed I have written on several occasions attempting to explain why stock markets seem to be doing better than one would expect when we are are now into recessions in most developed economies, with probably worse to come.

But it pays to re-check the actual facts from time to time. Although some share prices have shot up, most of the time that is the claimed “V” or similar recovery shape from deep lows. Here are a few broader facts (data taken from the BBC):

• The S&P 500 (the main US equity index) tech sector is up roughly 25% this year.
• The energy sector of that index is down about 37% and the financials group down 20%. Overall the market as expressed by this index is up a little on its February 19th record.
• Over half the shares listed in the S&P500 are trading lower than they were at the start of this year
• The FTSE 100 is 20% LOWER than its January high.
• The French CAC 40 is also down about 20%
• The Japanese 225 index is within 4% of its pre-crisis high (that will be in Yen terms)

An analyst at the Dow Jones index company is quoted by the BBC as saying that the risks of the US election and the potential for disappointment if the recovery already anticipated by the market does not happen are reasons for caution.

My take is that in many developed countries there is no real chance of an economic recovery in the next few months.

I would expect a ‘lagged’ impact from the Spring lockdowns across the world and the temporary burst of consumer spending that is only a release of built up frustration to fizzle out as job cuts and reduced salaries begin to be felt.

The businesses that have benefited from the lockdowns will in some cases now see tougher competition. It has been reported that traditional retailers, having been forced into upping their game online, are now taking market share from Amazon.

That does suggest it is a good time to hold shares in businesses specialising in online retail technology and distribution, something some fund managers will have picked up.

I hope I am wrong, but I am deferring my hoped for return to optimism.

I am interested in psychology because I am interested in human behaviour, not just as it impacts on investments, but with all its joys and horrors.

There is a clear overlap between neurology and psychology and I have read that neurologists can agree with the idea that over time, our brains get programmed with biases, or ways of making decisions that are based on sub-conscious training of the process by past experience and maybe even inherited ‘coding’ of parts of our brains.

This is very relevant for investors who cannot avoid looking at the past when deciding how to position their investments for the future. If the past (insofar as we are aware of it) does not include any similar patterns to a developing situation, when that situation finally develops, we will be caught out – what has been called a ‘black swan’ event.

I think that where we are now with stock markets is actually a very white swan event. I have seen those birds ever since I was a little boy!

If one refers to the financial pages of newspapers and even web sites (which look oddly archaic) from 1999 – now a simple task thanks to Google, they read like they were written yesterday. What followed?

In March 1999, the NASDAQ peaked, then a whole series of events which were spread out over a whole year undermined the false and in some cases crooked (Worldcom and Enron, you may recall) valuations of many businesses. In the end, the NASAQ fell by around 75% – yes 75%! Other markets fell from the knock on effects and investors had to wait some 2 to 3 years to start making money again.

I read that in the second quarter of 2020 there were large net inflows into UK operated mutual funds (OEICs), with the exception of funds actually invested in the UK, which had outflows. Bond funds, index trackers and SRI funds all had positive flows of investor money. This was described in the article I read as ‘bargain hunting’.

If you want to see how history repeats itself, Google an article published by money.cnn.com called ‘Investing: 2000 and beyond’ and compare it with what pundits are saying now. Then check out what happened next to markets. You will find other articles if you have the time, referring to bargain hunters and new paradigms.

You will perhaps smile at the concluding advice in the CNN piece that US investors ought to reduce their market exposure to only 80% US and risk a whopping 20% elsewhere! In 1999, most UK investors would have adopted a similar stance and been heavily biased to their home market. If they were still doing that now, it would have cost them very dear.

I decided to write this post about the similarities with 1999 based on my own experience and memory, but notice while researching the history that many others, including academic writers, have seen the same swan sailing across the lake.

We can’t know that history will repeat itself, but they say that a fool is a person who repeatedly carries out the same actions and expects a different result. Maybe this time it will be different but do you want to risk it?

Where I live, there have been no quarantine (lockdown) restrictions for some time, except for special situations like going to the doctor or dentist or visiting a hospital when masks and proper disinfecting are compulsory. The weather is warm and humid with thunderstorms and today is a National Holiday – the anniversary of the crowning of the one and only King (Mindaugas).

It feels like Summer in every respect, that time when global stock markets usually go a bit flat as the big players take holidays, volumes fall, politicians stop meeting and messing things up and I suppose everyone usually feels a bit less like working overly hard.

This year things will be very different depending on where you are. The relaxing of lockdown restrictions and opening of travel borders will allow many mostly younger people to try and forget Covid-19. That same opening up will, I am sure. re-ignite infection rates in places that were otherwise well in control.

As has already been demonstrated in the USA and Australia, there will not be so much a second wave as a resumption of hostilities. I get the feeling that the fight with the pandemic may be somewhat like the Great War, when gains and losses ebb and flow for years and many lives are sacrificed with the ‘donkeys” (ie leaders) mainly to blame for their ignorant and selfish leadership.

Yet, in spite of all that global stock markets are valuing companies as if nothing happened. This is in my opinion, and that of many others, simply because there is a glut of money (not real wealth) and it has nowhere else to go.

I suspect that over the Summer weeks to come, recent steady increases in share prices will stutter along upwards. The news flow on global economies will be terrible and there will be massive insolvencies and job losses but initially the market will pay no attention.

It is in my judgement certain that fundamentals like the need for businesses to make profits and borrowers to repay debt in a viable capitalist system will re-assert themselves.

At that stage, the market correction may be more dramatic than even what we saw in March 2020.

One can ‘make hay while the sun shines’, but one must get that hay under cover before the hurricane hits.