Invest-ability bulletin 24/11/21: What Lies Beneath

Headline indices are still making new records, but there’s trouble hidden under the surface

Covid is back, in Europe at any rate. The dreaded Delta variant has been ripping its way through the Continent, prompting the threat – or in some cases reality – of vaccine mandates and new lockdowns in many European countries. Lots of people are unhappy with the idea that their civil liberties can be so easily switched off, and have been taking to the streets in protest. I think we can safely say that travel stocks are still some way from making a return to business as usual.

Unusually, the UK looks to be in a pretty good position when it comes to the virus and, credit where credit is due, the government’s decision in the face of stiff criticism to end lockdowns over the summer looks to have headed off a winter wave. Very few people are ending up in intensive care and deaths are falling, thanks to the success of both the UK’s vaccination programme and the natural immunity many acquired celebrating the reopening. 

On the face of it, that means the prospects for domestically focused consumer sectors seem a little brighter this week as we head into the festive season. Shops are reporting brisk trade, and life is returning to the pubs as marquees are peeled back and the fires are lit. Talk of the Santa Claus rally has already begun. Despite all of the madness the world seems to be experiencing, headline indices are all still on the up and, in the case of the US’s major indices, still making new highs. And there’s nothing statistically to say that a market can’t keep on hitting new records
But that belies turmoil beneath the surface, especially on the Nasdaq where lots of once high-flying shares have suffered heavy sell-offs, including big names such as Zoom, Bumble, Peleton and Robinhood – turns out that investing isn’t quite as easy as the meme investors’ mantra of ‘buy things that are going up’ would suggest. I’ve been looking at Aim’s hydrogen shares this week, so it’s interesting to see that the Nasdaq’s own H specialists – Plug Power and Ballard – are among those caught in the sell off (keep an eye on the site for my report later this week).

Indeed, observers are now looking back to the dot com and seeing signs that history may be repeating itself. Aggregate valuations are way beyond those seen at the market top on the stroke of the millennium, and the pattern of sellling is similar to what happened in late 1999 – by the time the index peaked on the stroke of the millenium it had already been preceded by heavy falls in lots of lower quality ‘story’ stocks that weren’t making any money nor likely to be any time in the foreseeable. 

We all know what happened next as the final pillars of market support gave way – today that support comes from just a handful of very large tech companies, including Tesla, which is as much a meme stock as many of those B-list tech stocks and has already seen its shares begin a steady retreat from recent highs. It seems like a precarious situation to me.  

Profit warnings also seem to be on the up on the London market, and holders seem to be showing little patience with even the slightest disappointment. As Phil and I have previously discussed, this points to a lack of conviction among those buyers that have indiscriminately fuelled the last leg of whichever extraordinary bull market you like to use a reference – the compressed bounce back from the fastest bear market in history, or the very long bull market we have experienced throughout the Zirp era. 

Inflationary concerns suggest that era looks like it could be winding down, which is certainly what the market has inferred from the reappointment of Jay Powell as Fed chair. This is a particular worry for highly-rated growth shares, as Phil explained in the first of our new, free-to-read ‘Ask Invest-ability’ articles this week, and why we’re now seeing a rotation into sectors like energy and financials that are both unloved and which could benefit from rising rates. As Phil writes in this week’s Quality Shares Weekly, top slicing to lock in profits in companies that have re-rated substantially higher may not be a bad idea.

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