Invest-ability Bulletin 26/11/21: Black Friday

Stocks are on sale this week as new Covid fears bite- but are the bargains as good as they seem?

Today is Black Friday, the rather unsavoury retail event that has sadly made its way over from the States in recent years. Unfortunately, another unsavoury import has rather stolen its thunder this year – just as it looked like Saj’s booster drive had got Covid under control, a new variant threatens to sweep in via Heathrow airport before the borders are once again shut. Officials have described it as “the worst one we’ve seen so far” and the markets have responded in just the way you’d expect – a sea of red ink. Black Friday indeed.

We have, of course, been here several times already throughout the pandemic – one false dawn after another and huge swings in sentiment in various corners of the world’s stock market – short termism writ large at every turn. Now, responses to the latest unwelcome news range from ‘stay put, it’ll all be fine soon’ to ‘buy Covid winners’ to ‘sell everything.’

Personally, I’d suggest visiting one inevitable Covid loser – the pub – and getting a few beers in before they shut again and spending that time thinking carefully before doing anything. Selling out before a protracted bear market could help you avoid a lot of downside – the FTSE pretty much halved over a long and painful three years after the 31 December 1999 peak. But we do not yet know if a grinding dot com style market deflation is on the way – I hope not, because I have experienced that, and it isn’t fun. On the other hand, even if history suggests staying the course makes most sense over the longer term, remaining in the market may test one’s nerves to the extreme should that grizzly bear market materialise.

In reality, the answer probably lies somewhere between the two extremes, because it’s very clear that absolutely no one knows what treat Covid is going to serve up for us all next, or indeed what the secondary and tertiary effects in supply chains and monetary policy could look like. More curveballs could be flung in our direction – a geopolitical spat here, a climate catastrophe there and painful could get more painful. Or the latest variant of concern could prove to be not much to be concerned about at all, but buys central bankers another opportunity to kick the can down the road a bit further and save all the fun up again for another day.

But as Phil wrote this week, and as we discussed on the podcast, the more nerves get tested for whatever reason, the more fragile markets look. High valuations leave little room for error, and companies with previously high valuations that have fallen from investors’ favour may struggle to turn investors’ heads in the same way they did before. It’s often said you should run your winners – but it’s getting harder to see where those winners can run to from here, and easier to see what could stop them in their tracks.

Besides which, staying invested doesn’t mean staying invested in the same companies and funds – as Tony Blair may have put it if he were a fund manager, ‘Rotation, rotation, rotation.’ No company stays the same for ever, after all. So maybe the answer now is to invest in cheaper companies, where the margin of valuation safety is greatest, which is exactly what Phil has done in this week’s stock screen. As he put it when we discussed the myriad of unloved blue chips on the FTSE 100 on this week’s podcast – among them ABF and M&S, where I am sure a few Black Friday pounds will be spent this year as shoppers head back to the high streets – when expectations are low, it’s hard to disappoint. Unless Black Friday turns into another Black Monday, in which case it’s DFS where we’ll all be heading to hide behind the sofas.

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