02 March 2021
Lock, stock and barrel
Last week saw the share prices of US technology companies take a downward turn. The Nasdaq index of US stocks, which attracts many technology companies, had fallen by approximately 3.5% – however, towards the end of the week, prices started to revive once more.
Fast-growing technology stocks have considerably eclipsed the rest of the market over the past couple of years. Since coronavirus unleashed itself upon the world last year, ‘stay-at-home’ stocks that saw their earnings swell during lockdown periods also revelled in further share price growth. That said, since successful vaccine developments were declared last year, stocks in other sectors approved by ‘value’ investors have likewise enjoyed a renaissance.
Jim Henderson of Aristotle, which manages the St. James’s Place North American fund, implies that last week’s change may be an indicator that the rapid growth of Big Tech is having somewhat of a breather.
“That train seems to have slowed,” he stated, pointing out that last week’s movements in US stocks seem to be in line with that trend.
“There certainly does appear to be a continuation of the growth/value rotation that started late last year. In February, the value benchmarks have outperformed the S&P 500 by some 350 basis points [3.5%],” he added.
The savviest of approaches for investors is to uphold a well-diversified portfolio. With funds invested in assets on both sides of the rotation, their performance won’t depend on whichever style of investment is trending from one month to the next.
The inflation equation
In anticipation of higher inflation, markets experienced some movement last week. They appear to be gauging a future in which a swift post-COVID-19 economic recovery leads to higher inflation, and interest rates are duly raised.
The chair of the Federal Reserve dealt with concerns about inflation in last week’s meeting with Congress. Glossing over fears that inflation might spike later in 2021, he announced that the central bank would retain its high level of support for the US economy, which has helped bolster stock prices since it came into effect last year.
“The market is focused on inflation, both the good and the bad of it,” said Dan O’Keefe of Artisan Partners, which manages funds for St. James’s Place.
Stock prices are affected in different ways within a higher-inflation environment, he stated. A rapid economic recovery would be beneficial for particular ‘cyclical’ stocks, whereas higher interest rates are gainful for the financial sector.
“In this environment, our financial holdings, such as BNY Mellon and Citi, should benefit strongly. Modest inflation along with economic recovery would also be positive for many of our names, such as American Express, Expedia, Booking.com and Southwest Airlines, for example.
“On the other hand, the end of the low interest rate and low-inflation environment would arguably be bad for the high-priced growth stocks that have led the market for several years now,” he concluded.
Interest rate hike?
Here in the UK, inflation is also under scrutiny, as the market muses about when the Bank of England might begin to put up interest rates ahead of a potential post-COVID spending boom. The futures market is pricing in a first increase in the second half of 2022, and up to +0.75%-1.00% in five years’ time.
On the other hand, Capital Economics maintains that interest rates won’t move from their current record-low rate (+0.10%) within the next five years. It alleges that higher inflation will be fleeting, perhaps falling off in 2022, and that the Bank’s ability to loosen monetary policy will be reduced by government spending. Whichever way the pendulum swings, the onward journey will have its ups and downs for those reliant on cash savings.
Markets are inherently forward-looking, and so much of last week’s change in the share prices of US technology companies was linked to weighing up what the world will look like in future months. In the nearer term, however, the situation appears much brighter, thanks to the government’s ‘roadmap’ for lifting the current lockdown in the UK.
Boris Johnson’s announcement at the start of last week centred on a four-step plan to ease the present restrictions in the UK. There are some initial hints that people have seized the opportunity to regain a ‘normal’ life (see In the Picture). While markets refocus their vision in response to the changing landscape, the expectation is that life is about to take a turn for the better for most people.