Lately, stock markets have been getting jittery. Asian markets continued trading sideways while the US and European stock markets struggled to move higher in a zigzag manner. It seems to me that the stock markets have less concern over the resurgence of the number of Covid cases globally than the recent US policy initiatives.
“Ivan’s Reflection” is my monthly investment notes. The purpose of this article is to document my thought on stocks markets and investment ideas so I can review if they are right and wrong in the future. The strategy I use is called Global Momentum Compass which I have developed over the years through my experiences of helping clients manage their investment portfolios. Leave your email below so you can be updated when I release the next investment outlook.
New tech vs old tech
The previous pandemic beneficiaries such as technology stocks are still under pressure given Yellen’s comment that the US Fed “may have to raise rates”. I have explained in an earlier article that rising interest rate expectations are detrimental to the stock price of growth companies.
But we first need to recognize that technology companies are not all created equally. Think about it, do you still consider Apple, Microsoft, Amazon, Alibaba and Tencent as growth companies? Or, are they mature companies? The stock market has not treated them the same. This can be told from the year to date performance of Invesco QQQ ETF (large-cap tech) vs. ARKK ETF (next-generation tech) as shown with the chart below.
- The Invesco QQQ ETF, which tracks the Nasdaq-100 Index, ranks in the top 1% of large-cap growth funds.
- ARKK ETF is an actively managed ETF that invests in companies with “a technologically enabled new product or service that potentially changes the way the world works”.
This chart reinforced my belief that the market will distinguish between companies that are already making money and companies that are expected to make money.
The cryptocurrency market has gone through another turmoil in the past two weeks when Elon Musk, who used to be the catalyst for the bitcoin rally, openly criticized Bitcoin for not being environmentally friendly and suspended Tesla purchases using bitcoin.
What was even more dramatic was when a Twitter user who goes by @CryptoWhale said, “Bitcoiners are going to slap themselves next quarter when they find out Tesla dumped the rest of their holdings. With the amount of hate @elonmusk is getting, I wouldn’t blame him…”
Musk replied, “Indeed.”
If you follow my blogs, you know I am bullish on the future of blockchain and digital currency, but I have my reservation on Bitcoin as an investment.
Additional reading: Is bitcoin a good long term investment? (Feb. 18, 2021)
As we speak, Bitcoin is still plunging. The Elon Musk-propelled rally in Bitcoin just evaporated.
More volatilities ahead
I think what these events are telling investors is that more volatilities lie ahead. The investment markets are always intertwined: from stocks to bonds, from commodities to cryptocurrency, from real estate to mortgage securities.
When one asset moves, it inevitably causes a ripple in other asset classes. For example, after months of denying there was any risk, the US Fed has finally warned about high asset valuation.
I think the market has already factored in most of the good news lately:
- Corporate earnings surprise – many companies have reported earnings and profits that are better than analyst’s expectations.
- Vaccine rollout – the US and Europe have made good progress in vaccinations which paves the way for reopenings.
- More stimulus – global governments are still committed to spending money. They have printed so much money and now they need to find a way to spend it.
So we need new stories for the market to continue to go up.
Does a higher interest rate cause a bear market?
There are many concerns over hiking interest rate now. As an anchor for all asset prices, every 1% movement of the interest rate will cause turmoil in other financial markets. However, a higher interest rate is not necessarily bad for the stock market, at least not for the US stocks.
The chart below shows the 12-months stock performance following periods of rising 10-year bond yield. As you can see, the stock markets have on average performed positively during the past interest hiking period.
So the key here is to distinguish the winners and losers in a rising interest rate environment.
What is next?
Going forward, I believe the market will continue to be driven by two major themes:
- Rising interest rates and inflation expectations.
- The US’s monetary and fiscal policy such as interest rate policy, stimulus packages and the proposed capital gains tax proposed by Biden.
The inflation is real now. The projected 10-year US inflation (measured by breakeven inflation rate has hit nearly 2.5%, and this may be just the beginning.
At some point, the stock market will have to crash to wash out the weak hands. The question is will it be a short term correction or a structural shift in the investors’ risk appetite.
I think we should pay attention to all the “Investor’s money” on the sidelines – the market has risen with a lot of scepticism, which could be a good thing. It means a lot of bullets are ready to be shot should there be any short term correction.
Lastly, it is the time of the year again where you can learn a lot from one of the wisest men on earth. Take some time to watch Warren Buffett’s 2021 AGM for free.
These are some of his investment principles that you can apply immediately.
- Be wary of appeals to your gambling instinct – Buffett called gambling a “very human instinct”. As more people enter the casino than leave it, “it creates its own reality for a while and nobody tells you when the clock is going to strike 12 and it all turns to pumpkins and mice.”
- Never say never – Buffett stayed largely away from tech stocks for many years, saying he didn’t understand their business models. Now Apple is a huge holding — Berkshire owns just over 5%.
- It’s okay to admit mistakes – Buffett admitted that it likely was a mistake to sell some Apple stock last year, and that he learned a lot of lessons from a failed healthcare venture with JPMorgan Chase & Co. and Amazon.
- Cultivate optimism – Buffett recommends a sort of even keel approach to life: “In 62 years, Charlie and I have never gotten into an argument, never got mad at each other.”
After so many years in the financial industry, I believe we all need to learn to be content when it comes to investing and make peace with our investment decisions.
In a nutshell, you need to know what you are investing in, have a clear head, be happy and stay safe.
This article reflects my personal opinion on the investment market. If you are interested in finding out how I help my clients manage their investments, you can submit a request below for a non-obligatory discovery meeting.
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