Weekly Digest: old misery guts
31 May 2020
As a reminder, according to the Stock Market Almanac website, investors in the Dow Jones Industrial Average over the period from 1946 to 2016 would have accrued more than 100% of their gains in the November to April period, with net losses over the summer. Reasons for this range include the rolling forward of index and stock price targets into the new year, seasonal fund flows and allocations into investment funds, and the declaration of dividends during the annual results season, for example.
While paying attention to such influences, we do not run portfolios on the basis of stock market aphorisms. For one thing it’s impractical and expensive to churn in and out of markets twice a year. More importantly, averages are just that, and skewed by certain events that have had a disproportionately large effect. Last May I did highlight reasons why the market might struggle, and some of those are still valid, yet equities have continued to grind higher with only one little wobble during August when Kim Jong-un was launching missiles over Japan.
|FTSE 100 Weekly Winners|
|FTSE 100 Weekly Losers|
|Babcock International Group
There are no laws that decree how long any market cycle can last, and the current period is made more difficult to assess by the enduring influence of Quantitative Easing. The aggregate size of the big three central banks’ balance sheets (US, Europe and Japan – sorry, Mr Carney) is expected to continue to rise throughout 2018, with Europe and Japan still growing while the US starts to shrink. If this liquidity is not all required to be invested in real economic assets – which has been the case so far – the balance will continue to be diverted into financial assets such as bonds, shares and property. However, under most current projections, this balance sheet expansion is forecast to stall and then reverse around the turn of 2019, which could finally create a headwind. Of course, this is just one variable, and a lot will also depend on how well the global economy is faring and how successfully companies are able to generate higher earnings and dividends. Currently the outlook is good, with little threat of a recession on the horizon in the important economies.
Unfortunately, the UK economy is bringing up the rear in terms of current performance, (although what happens in the UK these days has very little impact on the rest of the world). This was brought sharply into focus during last week’s budget, when the Chancellor delivered the Office of Budget Responsibility’s downgraded growth forecasts. The OBR now sees 1.5% growth this year, falling to just 1.3% next year and also in 2020. At least he cast off the “Eeyore” mantle and delivered possibly the most fiscally stimulative budget in a decade, which might have been as much a political initiative as an economic one. We continue to broaden our horizons in terms of investment opportunities, increasing our exposure to non-UK markets. One telling statistic is that just 1% of the FTSE 100’s weighting is defined as technology, compared to 23% for the US, 12% for Japan and 8% for Europe. This is a sector that investors cannot afford to ignore.
Finally, it is interesting to note that food delivery firm Just Eat is poised to enter the FTSE 100 Index after this week’s reshuffle. Just Eat is officially listed as a retail company, although it is mobile and internet technology that has enabled its rise. Like last week’s Black Friday event, this is another example of the changing nature of the retail landscape. One often debunked, but not implausible, theory for the name Black Friday is that it is the day of the year when the retail industry moves into profit - somewhat ironic given that the biggest generator of sales is Amazon, which is not currently much interested in generating profits from its retail activities. Finally, the date of the US Thanksgiving Day holiday was set as the fourth Thursday in November under President Franklin D. Roosevelt. This week, today is Lancashire Day, which commemorates the day in which year that the county first sent representatives to Parliament?
Year-to-date market performance
FTSE 100 Index, past 12 months
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