Bubble Trouble, Halve or Double
“The greatest truth about markets is it’s not what you think you know that matters. It’s what other people collectively think they know that counts” – Bill Blain
“Explanations exist. They have existed for all time. There is always a well-known solution to every human problem that’s neat, plausible and wrong” – H L Mencken
Only a month ago we were all out investment bubble spotting. In our own bubbles of course if we didn’t want to be arrested for chatting to other human beings.
And what caused this latest wheeze?
Well, true to form, ‘legendary’ economic and market experts (pessimists), who only a year earlier were unanimous in their predictions of a painfully slow recovery in world economies and beaten down share prices following the Covid panic last March, and who got it wrong again, last month warned us that we were too late to join in the party because the bubble was about to burst.
Funny that eh?
Let’s remind ourselves of what happened to world stock markets from last February.
Over in the US the best measure of stock market health, the S&P 500, hit an all-time high on Valentine’s Day 2020. But love didn’t last long. The index fell rapidly from a high of 3380 to a low of 2237 in only 22 trading days. That’s over a third of its value.
Over here in the UK it wasn’t much better.
The FTSE 100 Index by some miracle hit 7409 by Valentine’s Day last year and then copied the S&P 500, falling a third to 4994 by the 23 March. A Sentiment Indicator I follow is much more accurate than any BBC weather forecast. It’s known as a FEAR/GREED barometer and is hugely accurate in predicting what’s likely to happen to stock markets over the following weeks and months.
It’s similar to ‘The Swingometer’ gauge they used in UK Elections. This one, however, goes from Zero on the left-hand side, measuring Extreme Fear, to 100 on the right hand side, measuring Extreme Greed. It’s a contrarian indicator.
Thus, in December 2019, it was at 81, which past experience tells you it’s time to be cautious and maybe bank some gains.
By only the 23 March it had swung to Zero, an all-time low in extreme fear. It suggested it was one helluva buying signal for the brave.
And that’s how it turned out. Despite the hysterical pessimism of the usual culprits what’s happened since is remarkable. Not that you’d have noticed mind, from the nightly gloom on the telly.
Upside After Down…
Over in the US the S&P 500 has gone up by more than 76%.
No such luck for the UK stock market in the shape of the FTSE 100. But it is up almost 35% which is better than a kick in the arse, to use technical investment jargon for a moment.
But then, as I wrote last month, suddenly we were worried about bubbles. US stock market statistics back to 1928 show that ALL investment gains since then are attributed to fewer than 4% of quoted companies, and that HALF of ALL gains were produced by only 90 of more than 24,000 companies. However, experts warned that the stunning returns since last March were thanks to only a few big tech companies.
And that was a big concern.
Actually, what’s happened over the last 10 years and then last year isn’t at all unusual, as research clearly shows.
But despite that evidence we’re now told that such a concentration of big winners is a bad sign. And that bad sign this time around includes what’s known as Big Tech.
You will no doubt recognise their names which include Facebook, Apple, Amazon, Google etc. Some bright spark put them into an acronym you will recognise- FAANGS.
It’s a US phenomenon unfortunately which mainly explains why the FTSE 100 has gone nowhere this last 20 years. We don’t have Big Tech in the FTSE 100. We did have Vodafone and BT though, big stars in the 1990s but look at what happened since.
On second thoughts, it’s probably best that you don’t look.
Pick Me A Winner…
Now I’d imagine the more observant of you will be saying “But Alan, last month you said we weren’t to worry about bursting bubbles, and look at what’s happened to tech stars, including Tesla and Zoom that had attracted speculators and day traders while the ‘real world’ suffered under lockdown.”
‘While sadly I’ve made a pig’s ear of picking individual shares that turn into losers I’ve been more fortunate picking and holding on to a team of winning fund managers’
And it’s a fair point. But it depends on your stance as an investor and your attitude regarding perspective.
Personally, I don’t invest much into individual shares. I’m crap at it. Over the years when I bought a share that looked great value or seemed to represent a service or product about to disrupt the world and make me a fortune, it ended up disrupting my marital happiness.
So, I now find fund managers who are better than me at avoiding the dross. Apart from that it’s simpler and easier to tax plan.
When the FEAR/GREED indicator hit zero last March, the emotional pain told you it was time to sit tight – ‘Don’t panic Captain Mainwaring’ – and pray. It was also a signal to aim for growth but keep sufficient defence in case this time it really was different. ‘Uncomfortable diversification’, we call it.
And when you pick your fund managers, whether attackers or defenders, it makes sense to pick the best players to fit into the best team for the conditions.
It makes more sense if you don’t have to pay transfer fees to attract the best to deliver year after year. Once in your team it’s best to keep close to them. Warren Buffett said ‘put your eggs in a basket but then keep your eyes on the basket.’
While sadly I’ve made a pig’s ear of picking individual shares that turn into losers, I’ve been more fortunate picking and holding on to a team of winning fund managers. So instead of getting my knickers in a twist because the best performing fund over the last five years in my pension fund fell 17% over the last month, I prefer to focus on its 81% net gain over the last year and its 25% a year returns since 2016.
I appreciate there are still plenty of pessimists out there predicting recessions, rising inflation/and or economic carnage. As my old grannie used to say “If it’s no one thing it’s another.”
If you check you’ll discover that there’s approaching $20 trillion sitting in US bank accounts and £2.5 trillion in UK bank accounts earning zilch. The UK savings rate last year rocketed to 30%!
The point: I don’t think there’s ever been a recession when there’s been as much cash around.
As to inflation, my generation survived 26% inflation back in the 1970s.
When this lockdown ends, whenever that is, and whether or not we all rush out to spend all that dough central banks printed and then we stuck away, something tells me we’ll be fine.
After all, history tells us that things are never as good as predicted and never as bad.
The Swingometer is back to neutral.