The Re-rating
I may have spoken too soon a fortnight ago, if you thought we had a lot of hikes expected back then, you're now going to need new shoes, socks and a packed lunch.
A lot's happened since we last spoke, but you know that already, so lets focus on what matters. Has everything changed or has not much really changed? Plus, it’s a Winter Olympics special edition this week☕️
Am I the only one who doesn't understand curling? The winter olympics are under way, and there is an investment angle as it means the lack of overseas tourists has caused the expanded pilot of the digital yuan (it’s one of only 3 payment methods accepted in the village) to be a bit of a damp squib. Do digital currencies matter in 2022?
The internet is going crazy for the brutalist steel mill aesthetic that Beijing went for in the ski big air events, it brings a real dystopian energy I feel.
the Bloomberg medals tracker is here - currently the Germans, Austrians and Nordics sitting on top.
The Tarantino market* is where everything looks fine in the front room but down in the basement all hell breaks loose (while Mark Zuckerberg pedals on a Peloton in the corner, probably). Tracy Alloway at Bloomerg and Peter Atwater coined this December last year, but it is definitely still where we're at
There's so many different experiences right now: UK/value stocks: nice little start to the year. Global index funds: nothing much to see here. Growth/tech: ouch, nasty correction. Small caps: bear market. Q1 2022 active manager performance is going to be a hot mess when it comes in (sorry for the technical jargon). Can't wait to sort through all that.
Just give me the takeaway!
Tl; dr INFLATION - and It's still all about those rate hikes. Half a hiking cycle is being brought forward to 2022: (5-7 being forecasted this year in the US, 5 in Europe). And there's earnings (good), there’s economic data (generally good) . Inflation (highest in a generation), and central bankers (confusing). It's all been happening.
BUT the real story here is actually how benign overall stockmarkets have been these last two weeks - major indices are up 4-5% from last we spoke. Beneath the surface however there's more twists and turns than a Shaun White halfpipe run. Re-rating is your buzzword du jour. I love a forecast as much as the next person but it helps to bear in mind no-one really knows what is going on here.
Look, it’s entertaining, but it’s also easy to forget that the aim isn’t to fit it all into one complete narrative, but rather to step back from the noise , assess what’s still true, what matters and above all avoid making bad long-term investing decisions.
3 things I'm reading
Regime change can be an overused cliche which implies more clarity than ever really exists - no-one ever rings a bell when things change and it’s always different this time. But John Authers is perhaps right to invoke the term, it feels like a lot is on the table here. And there are always charts to back it up.
The most meta thing we saw all week was ...the company formerly known as Facebook (they have an app that's a bit like a bad version of Tiktok for your parents generation), in the week of their 18th birthday unveiled their first ever fall in users, plus some egregious spending going on inventing the metaverse (we now do know one thing about the metaverse, which is that it''s unbelievably expensive), neither of which investors seemed to like very much. The stock has now underperformed the S&P 500 over 5 years,
But don’t take the wrong lesson away here, this isn’t a broad tech related bubble bursting, plenty of the other mega-cap stocks had great earnings and saw their stock rise. In a neat symmetry Amazon added roughly the same amount of market cap ($200bn) as Facebook had lost (a single-day Wall Street record, mind). Today’s mega caps are big because they have some of the best fundamentals of any group of stocks ever, and Apple, Alphabet remain just a few percent off all-time highs.
JP Morgan’s end-Jan guide to the markets is out. What's your favourite price earnings ratio? I pretty much think the Price/Earnings (PE) ratio is mainly a waste of time , it's lazy, and it's just so overused, and everytime someone shows me a chart with it on I instantly know what they are about to tell me to do, & it’s been the wrong thing for the last decade or so. but a lot of people do like it. So I'll talk that language. The latest moves in the market plus earnings have pushed these ratios down more than you might think from the Covid-era peaks. It’s what you’d expect in a world where rates are rising. If you follow these things you may be interested to know that Facebook's PE ratio (17) is hovering just under the average for the S&P500. #valuestock
Two things I'm listening to
These are the two top discussions I've heard of the current Ukraine situation. The economist asks - Ukraine (website | Apple) and The Daily from the New York Times (website | Apple)
Howard Marks' notes are a wealth of extremely thoughful, long-term oriented and investor psychological goodness that only comes with the sort of experience he has. Here he discusses: Why do people sell? Because an asset is up and/or because it’s down. Is that a contradiction? There’s a lot of psychology in it, compounded when you’re managing someone else’s money. Lots of long term winners (eg Amazon) would have given you plenty of reasons to sell on the way up. Market timing is the least good reason to sell something you like long-term; as it opens up at least 3 opportunities to be wrong.
One thing to brighten your day - the Finns strike back with their view of an American workday (watch till the end).
Bonus froth -
Remember when we all became Baltic Dry index experts back in '08? It looks strongly like the index of the moment is the Bloomberg Pret footfall index. Back to pre-covid levels in several parts of London including the West end.
On our pod this week - why you should care about asset managers voting, and why they (still) aren't doing it enough (Apple).
Till next time, investment geeks!