George Salmon 12 December 2018
George Salmon, Equity Analyst
Volatile trading in October and November saw the value of companies like Amazon rise and fall by tens of billions of dollars, day after day. But with more downs than ups, shares are generally lower now than two months ago.
So, what’s been going on?
Reaction to third quarter numbers from the tech giants was lukewarm, but we think the main reasons for the turbulence are factors like political uncertainty and jitters over rising interest rates – the big macroeconomic stuff.
For example, November’s midterm elections weighed on investors’ minds, while Trump’s twitter account has continued to fray international relations.
Despite briefly giving hope to a trade truce between the US and China, the President has stepped up his protectionist language again. Add in the arrest of Chinese tech giant Huawei’s CFO, and we think the saga could have further to run. Disappointing, as markets would prefer the world’s two biggest economies to play nicely.
Interest rates have also played a part in the market volatility.
Back in September, the Federal Reserve voted to raise interest rates to a range of 2-2.25%. While that hike was widely anticipated, some of the comments that came with it weren’t.
The minutes, released in October, hinted the Fed would be open to a policy that goes beyond a ‘normalisation’ of rates. That would mean raising rates faster than expected.
Not only do higher rates mean higher returns on cash and bonds, reducing the relative appeal of holding shares, they also increase the cost of borrowing. That translates to higher financing costs for companies, and can reduce consumers’ credit card spending. Both are bad news for most companies.
But is it all bad?
Uncertainty never sits well with the markets, but it’s not without justification they say a week’s a long time in politics.
The unknowns around the election have of course faded, with the midterms turning out broadly as expected.
That result was followed by an unanticipated about-turn from the head of the Federal Reserve, Jay Powell. His latest comments aren’t half as hawkish as those that gave the market a fright a few weeks ago. That’s served to calm, for now at least, fears around the trajectory of interest rates.
It’s been a broad sell-off, but the tech heavy Nasdaq is down by more than the wider market. That tells us tech has been at the sharp end of the falls.
We think that’s because lots of these companies trade on more premium valuations, which can be difficult to sustain. In the context of an uncertain political terrain and challenging macroeconomic news, results have to be tip top to relieve worries.
While third quarter numbers weren’t all as stellar as some had been hoped, in most cases we didn’t think there was too much to alarm investors. Alphabet, for example, delivered results that were broadly in line with prior expectations, while streaming service Netflix actually added significantly more customers than had been forecast.
The volatility came after three consecutive months where the US market didn’t move by more than 1% in either direction on a single day. So, will we look back and say the summer was the calm before a prolonged storm, or will the New Year see the market settle back down and resume its steady rise?
The short answer is we can’t be sure. Nobody can, really. As we’ve seen, there are too many short-term variables at play.
However, longer term, the odds start to move in investors’ favour. America has several attractive features. For example, 8 of the top 10 universities in the world help US companies drive innovation and technological change, with a large and affluent consumer base supporting growth. Factors like these have helped the US market consistently be one of the strongest performing in the world.
Today, we think the US is home to some amazing and dynamic companies – although there’s no guarantee it’ll maintain the strong growth that has characterised recent years as past performance isn’t a guide to the future.
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