Market Commentary June 2024

The FTSE 100 has been left out of the “AI mania” gripping global markets, but the UK’s blue-chip index made new record highs in May and is up 7% for the year. London’s bias towards “old economy” sectors such as raw materials and banking have held it back in recent years, but that weakness has turned into a strength. Commodities are real assets and thus look attractive in a time of persistent inflation, while higher-for-longer interest rates will boost bank profits. The prolonged uncertainty following the 2016 Brexit referendum prompted investors to attach a higher risk premium to UK equities. Yet calmer political waters in Britain (there is little difference between Labour and the Conservatives on macroeconomics) mean that the Brexit risk premium now looks to have disappeared. Meanwhile, UK stocks are paying twice the dividend available in many comparable markets, but continue to trade near a record-low discount.

Market Commentary May 2024

Good feelings tend to fade away fast when confronted with discomfiting reality. Following hot jobs and inflation data, investors were confronted with stumbling stocks and surging Treasury yields though mid-April. In addition to pressuring stocks, the rise in yields boosted the VIX to multi-month highs and caused a recalibration of expected Fed policy moves. However, the market has swiftly recovered suggesting that investors are anticipating the beginning of rate cuts, rather than dreading rate hikes as they had been doing for more than two years.

Market Commentary April 2024

A chart really is worth a thousand words. Technical strategists say that investors in any given period are either in the mood to “sell the rally” (bear markets) or “buy the dip” (bull markets). If 2022 was all about sell-the-rally, 2023 was (mostly) about buy-the-dip and the strategy was intense and infallible during the final quarter. Year-to-date, the dips have been shorter and shallower, usually less than 1%, before bullish buying has reasserted itself though with less intensity than in Q4. Some technical investors see weakening buy-the-dip enthusiasm as a warning sign of a near-term top. But for over a year, investors have been more inclined to buy dips than to sell rallies. Until we see a change in that trend, the likely direction is upward.

Market Commentary March 2024

Record highs for everyone – Tokyo, New York, Frankfurt, Paris but poor old London isn’t getting a look in. Maybe that’s a good thing. We don’t like all this froth. Yet according to Bank of America, overseas investors should not get too concerned. “An all-time high is not a sell signal. It’s worth remembering equity markets efficiently reflect earnings growth through time. Stock prices don’t have memories so, barring a major de-rating, 2024 could be a strong year for equities”. UK investors should not become too despondent either. Apart from those all-important ‘D’ attributes (diversification and dividends), an easing rate cycle will make old utility stocks far more attractive and expected weakness in the sterling/dollar exchange rate should drive gains in firms with substantial overseas earnings.

Market Commentary February 2024

The “Energizer Bunny” stock market seems to have a lot of juice left, as the major US indices power to new all-time highs. Each day and each week, the market goes up and the rubber band is stretched further and further. Since the low of 27th October, the S&P 500 has soared almost 20%. Generally, gains like these occur during the early stages of a bull market. The 14-week RSI (a momentum indicator) hit 72% in late January, indicating the market is overbought. Just because we are overbought though does not necessarily mean stocks are necessarily approaching a top. In most cases, the market eventually pauses only to continue moving higher.

Market Commentary January 2024

We wish all our clients and readers a very Happy New Year. John Bogle, the founder of index-tracking firm Vanguard, once said “Intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think they can consistently outsmart the market.” As we know, 2023 followed a nasty bear market in many stocks, especially in the Technology sector. Coming into the new year, investors generally were bearish and not loaded with tech stocks. Well, if you just owned the S&P 500, you have done quite well. But the 71% of stocks in the S&P 500 have underperformed the index, with most of the gains coming from a few tech giants. While Mr Bogle has probably rolled over in his grave based on the concentration of returns this year, his simple advice worked again.

Market Commentary December 2023

During various recovery spurts, the one thing that has been consistently lacking in this market has been breadth. A handful of AI superhero stocks cannot carry the market forever. Since making its recent lows in the 4,120s at the end of October, the S&P 500 has bounced back strongly. Are we finally seeing signals of better breadth, at least on a short-term basis? One month ago, just 33% of US stocks were trading above their 20-day simple moving average (SMA) trendline. That percentage has moved up to 65%. Short-term SMAs can be unreliable and tend to flap like a pennant in the breeze based on the market mood. While the 20-day breadth trend is encouraging, the market has a long way to go before establishing sufficient longterm breadth to signal that this advance has staying power.

Market Commentary November 2023

In November 2022, the launch of the popular artificial intelligence (“AI”) app, ChatGPT, made generative AI applications available to a large public audience. There are multiple applications of AI in the real world, with varying degrees of capability. Machines may never get to human-like self-awareness, but generative AIs are getting better and better at cognition, which is the ability to incorporate past actions and learning experiences into future practices. AIs are now generating text, poems, research papers, drawings, and videos. In order to do all this, these models require to be fed vast amounts of data, which entails using a significant amount of computing power and thus energy. Digiconomist estimates that by 2027, worldwide AI-related electricity consumption could increase by 85 to 134 TWh annually. This would be comparable to the annual electricity needs of countries like the Netherlands, Argentina and Sweden. The potential growth highlights that we need to be very mindful about what we use AI for. It’s energy intensive, so we don’t want to put it in all kinds of things where we don’t actually need it.

Market Commentary October 2023

Government efforts to encourage and develop renewable energy resources have intensified in recent years. But multiple factors have simultaneously driven up demand and prices for traditional petroleumbased energy resources. These include OPEC production cuts, geopolitical turbulence in Eastern Europe and the sharp rise in interest rates which has driven up the cost of financing new renewables projects. To the surprise of economists who expected a recession based on rising interest rates, most major economies have avoided steep economic downturns. Indeed, many economies are growing faster than expected, resulting in rising demand for energy from consumers and businesses. Global efforts to get work-from home employees back to the office are contributing further to rising oil demand. This all adds up to surging petroleum demand in what was supposed to be by now a renewables world.

Market Commentary September 2023

August has seen the unwinding of the seven-month rally in technology and digital stocks that, to varying degrees, lifted equities across most sectors this year. Stocks often struggle in the summer; but usually that means they are lethargic, not heading notably lower. What caused stocks to give up big parts of their year-to-date gains? AI mania drove much of the stock rally in the first half of the year. And in any stock-market mania, unbridled enthusiasm gives way to second-guessing at some point. Consumers and businesses show few signs of spending fatigue, contributing to inflation’s persistence. We think the difficulty in getting inflation down to the 2% target level, along with some buyers’ remorse on AI mania, has prompted investors to take profits.