“In many ways right now, it feels like business as usual for the financial markets, as leading tech stocks like Apple, Facebook and Alphabet unveil blow-out quarterly earnings, the FTSE 100 is having another crack at breaking through the 7,000 barrier and central banks seem in no rush to switch off the hose of cheap liquidity with which they are dowsing markets (unintentionally or otherwise). But this week’s minor stumble over a throwaway line from US Treasury Secretary Janet Yellen – quickly retracted – may suggest otherwise,” says AJ Bell Investment Director Russ Mould. “Even the merest hint of an interest-rate rise sent markets into a mini tizzy and stirred investors from the comfort zone, where record-low interest rates and QE have drugged them, like a patient etherised upon a table.
“It can be too easy to read too much into such short-term moves, as nothing goes up (or down) in a straight line. One way to test the market mood is to check out what is going on at the market darlings, the areas that are doing (or have done) best and are garnering the most coverage, from analysts, press and commentators alike. If they are keeping on running, then all may still be well. If not, this may be the first inkling of trouble ahead, or at least a shift in the market mood.
“Both the Archegos hedge fund and Greensill Capital went down in March, despite the bullish market backdrop and expectations that the global economy is on the mend. That still feels odd.
“Markets have so far done a good job of shrugging off those failures, but experienced investors will remember markets kept rising after the first two Bear Stearns property funds collapsed in June 2008 but it did not take long for deeper problems to appear, so investors must remain vigilant, especially as there are some signs that some of the hottest areas are starting to cool and few things change sentiment as quickly as a change in price momentum.
Source: Refinitiv data
“This can be seen in the fortunes of both Bitcoin and Special Purpose Acquisition Companies (SPACs), a phenomenon that has gripped the US market in particular. The Next Gen Defiance SPAC Derived ETF, which tracks a basket of over 200 SPACs is down by more than a third from its high. This is perhaps less of a surprise when you consider the data from SPACinsider.com which shows how 305 SPACs are looking for a target even though 268 have already floated. In the end, supply may be outstripping demand.
Source: Refinitiv data
“Setbacks in Bitcoin are nothing new and cryptocurrency supporters will be unperturbed but the way the performance of Initial Public Offerings (IPOs) is tailing off around the world is worthy of note. Perhaps the quality of deals is going down as the prices are going up, or, again, supply is starting to catch up with demand (although Darktrace is off to a good start in the UK, at least).
Source: Refinitiv data
“There can be no better proxy for the current bull market than Tesla. Yet even Elon Musk’s charge is losing a bit of its power to impress and that is weighing on another momentum favourite, Cathie Wood’s ARK Innovation ETF, a $22 billion actively managed tracker which aims to deliver the performance of 58 tech and growth stocks.
“Even that classic gauge of both market sentiment and economic activity, small-cap stocks are pausing for breath, although America’s Russell 2000 is yet to roll-over.
Source: Refinitiv data
“All of this could be healthy. Again, nothing goes up in a straight line and some of these assets and securities were looking bubbly, at least in the eyes of some. A cooling off may be no bad thing.
“Equally, it could be just a sign that markets are moving on. Frontier and emerging equity markets still look to be showing upward momentum, a trend that would fit with the narrative of a global economic recovery and bullish investor sentiment – few areas are more peripheral than frontier arenas such as Vietnam, Morocco, Kenya and Romania.
Source: Refinitiv data
“As such, we could just be seeing the next leg of the switch from defensives and growth to cyclicals and value. And if the upturn does prove inflationary, then there is a further trend to watch.
“This is the relative performance of commodities, as benchmarked by the Bloomberg index, against the FTSE All-World equities index. Real assets have underperformed paper ones for a good decade, but the chart may have begun to bottom, to perhaps herald a shift in sentiment. If so, portfolios will need to look very different in the 2020s if they are to thrive, compared to how they looked in the 2010s.
Source: Refinitiv data. Divides value of the Bloomberg Commodity index by the value of the FTSE All-World equity index.
