The famously bearish Société Générale analyst Albert Edwards complained last December that stock markets were in such a bullish mood that they would "shrug off an alien invasion of planet Earth". An exaggeration? Perhaps, but until last Thursday, they didn't seem too bothered by the prospect of a nuclear apocalypse.
An escalation in US-North Korea tensions; both countries led by erratic egomaniacs; Donald Trump's warning that North Korea faced "fire and fury like the world has never seen" – one might have thought spooked investors might have taken profits last Wednesday, especially with the Dow Jones on a 10-day winning streak. Instead, the move was decidedly muted, with the S&P slipping just 0.2 per cent.
Remarkably, that was the index’s biggest loss in a month. Things have been amazingly quiet, with the S&P 500 going a record 15 consecutive days without a daily move of 0.3 per cent. That run ended on Thursday, when investors finally woke from their slumber and the S&P 500 fell 1.5 per cent.
Asian investors deem the odds of a major confrontation as slim but not non-existent, with Japanese, Hong Kong and South Korean indices all falling more than 1 per cent last Wednesday.
While US markets were right not to panic, the belated reaction suggests complacency had taken hold among investors. The last 3 per cent dip occurred in November, the second-longest streak in history. At this stage, a pullback would be healthy.
Buying before the crash
Last week marked the 10th anniversary of the start of the global financial crisis, and there was lots of soul-searching regarding the "warnings from history that Wall Street ignored', as the Financial Times put it. For investors, however, the main lesson is a counterintuitive one.
Buying the S&P 500 in August 2007 would prove to be a gut-wrenching experience; stocks had halved by March 2009 and took almost six years to get back to breakeven. If you’d held on for all of the last 10 years, however, you’d have done just fine – including dividends, the S&P 500 returned 7.8 per cent annually, only slightly below its long-term average.
The US market was, of course, much quicker to recover than other major markets. Still, the fact remains that time tends to heal even the gravest of stock market wounds. Hence the old cliché about time in the market being more important than timing the market.
Blackrock noted last week that since 1970, global equity returns have been negative in only 2 per cent of rolling 10-year periods.
Stocks are expensive today, as they were in 2007. For ordinary investors, however, the lesson is that “timing markets is hard”, says Blackrock, “and avoiding them costly”.
Trump is a boon for ethical stocks
Political elections always trigger chatter as to which stocks and sectors might profit from the incoming administration. Sometimes, however, the changes are counter-intuitive.
Last week, Morningstar noted that President Trump’s deregulatory and anti-climate change policies were driving investors into sustainable funds. Net inflows in 2017 have already topped 2014 and 2015 levels and are on pace to top 2016 flows; a dozen new funds have opened; there has been a fourfold increase in the use of ESG (environmental, social and governance) data on Morningstar’s platform.
Trump’s election triggered speculation that “bad” companies would outperform their conscientious rivals, but increased investor interest has helped sustainable funds outperform in 2017.
A similar phenomenon occurred during the Obama presidency, notes Reformed Broker blogger Josh Brown. Anticipating increased controls, people stocked up on guns and ammunition. At one stage, Brown notes, shares in gun manufacturer Smith & Wesson had risen by 1200 per cent during Obama's reign. Since Trump's inauguration, pro-gun citizens have relaxed once more, resulting in gun sales dropping dramatically.
Obama, Brown concludes, “was hands down the single best guns and ammo salesman the world has ever seen”, and Trump is “the best ESG salesman ever” – epitaphs that neither man would be keen on.
A busy analyst is a bad analyst
Decision fatigue is a real problem, according to a new study investigating analyst accuracy.
Analysts cover multiple companies and often issue several forecasts in a single day. However, accuracy declines over the course of a day as the number of forecasts issued increases, the researchers found. The more they forecast, the more likely they are to herd more closely to consensus forecasts, or to self-herd (that is, reissuing their own existing forecasts).
The results are hardly surprising, given that earlier research has found that judges are more likely to offer parole after they have eaten.
Last year, hedge fund Voss Capital told investors they encouraged employees to take frequent breaks, including “intraday naps or meditation to replenish ego”. The new research suggests such a move might benefit analysts and investors alike.
See https://goo.gl/onUmtP.
