The volatile trading during much of September has continued into October, with markets seemingly unable to pick a particular direction. According to Bloomberg, the S&P 500 alternated between gains and losses of at least 1% for four straight sessions this week – the longest stretch since June 2020. Ten-year Treasury yields, too, are swinging wildly.
Consider that the MSCI has returned 14.19% year-to-date as of the end of September, while August and September, and month-to-date October, have witnessed far greater volatility, dominated mainly by what we refer to as ‘daily noise’. This noise includes what the US Federal Reserve will do and when; deferment on reaching a solution to the US debt ceiling; uncertainty pertaining to the power crisis and Evergrande collapse in China; while at the same time many global titans are experiencing a surge in earnings growth, which means investors cannot be blamed for being confused as news has varied from negative to positive.
At Dynasty, we tend to ignore the daily noise and base our investment decisions on defendable research and empirical processes, which have proven to be most successful over time. Amidst all the known risks, the JSE closed 1.83% up yesterday, with the S&P up 0.83% by Friday early afternoon, following a positive Thursday. In summary, market corrections are normal, and our consistent advice is that clients should adhere to the asset allocation blueprints and strategies we have set for them.
This philosophy was most recently proven to be optimal last year with the unprecedented Covid-induced market crisis, as stocks recovered against all expectations during the year, eventually to even surpass previous record highs. Specifically, from April 2020, investors acting on ‘daily noise’ would have most likely made incorrect and very costly decisions. As we approach the end of 2021, the global economy is generally re-opening. This week, Merck announced a successful trial for a post-infection treatment protocol, which if successful, would be a major gamechanger for some return to normality.
To summarise, in contrast to daily noise, our policy is to flag the “known” risks and opportunities and to position our client portfolios accordingly.
“The stock market is a device to transfer money from the impatient to the patient.”
– Warren Buffett
“A 10% decline in the market is fairly common – it happens about once a year. Investors who realise this are less likely to sell in a panic and more likely to remain invested, benefitting from the wealth-building power of stocks.”
– Christopher Davis
- Fears are emerging that bond market could trip up megacap technology stocks, which rallied through a global pandemic, fears of a bubble and rising regulatory scrutiny. Although shares such as Apple, Microsoft, Amazon, and Facebook have delivered outstanding returns, this week saw a selloff erase more than $300 billion from their combined market value, sending the Nasdaq 100 to its worst week since late February. This was due to a sudden spike in Treasury yields that sent tremors through Wall Street.
- Stocks then advanced on Thursday, with investors cheering developments in Washington as lawmakers reached an agreement that would temporarily avert a government default by mid-month. The three major indexes extended gains after Senate Majority Leader Chuck Schumer said Thursday morning that lawmakers had reached a deal to extend the government’s debt limit through the beginning of December. Such a move would offer time to prevent a government default that many pundits said could come as soon as around October 18.
- In addition, significant earnings upgrades are likely to provide respite to cagey investors, as stock valuations hover near historic highs. A sustained economic recovery would take hold should demand continue to improve accompanied by an easing in supply-side bottlenecks, prompting analysts to upgrade their estimates about what the future holds for corporate bottom lines.
- Britain’s supply chains for everything from pork, petrol and poultry to medicines and milk have been strained to breaking point by shortages of labour in the wake of the Brexit and Covid crises. To combat this, the UK government has ordered the army to help deliver fuel to help compensate for an acute shortage of truckers. Panic buying of fuel amid the shortage of truckers triggered chaotic scenes across major cities last week with queues of drivers stacked up. Some have had fist fights over the pumps while others hoarded fuel in old water bottles.
- The world was left without access to Facebook and its family of apps, including Instagram and WhatsApp, which were inaccessible for hours on Monday. The outage took out a vital communications platform used by billions and showcased just how dependent the world has become on a company that is under intense scrutiny.
- In China, coal stocks are down to 18 days’ cover, a measure that is deemed dangerously low by Beijing. It has long been the nightmare of Communist Party planners that the US might weaponise China’s dependency on fuel imports in a crisis. State-run China Energy News said thermal coal inventories at power plants are critically low as prices rise, having quadrupled in a year.
- This comes as a top official in the United Arab Emirates has sounded the alarm about escalating tensions between China and the US, delivering one of the starkest regional warnings yet about competition between the two powers. UAE presidential diplomatic adviser Anwar Gargash has raised concerns about the possibility of a cold war.
- Meanwhile, an unprecedented leak of financial records known as the Pandora Papers has revealed the offshore financial assets of dozens of current and former world leaders and hundreds of politicians from Asia and the Middle East to Latin America, Bloomberg reported. This comes as the International Consortium of Investigative Journalists obtained 11.9 million confidential documents from 14 separate legal and financial services firms, which the group said offered “a sweeping look at an industry that helps the world’s ultrawealthy, powerful government officials and other elites conceal trillions of dollars from tax authorities, prosecutors and others”.
- In Covid news, a new approach to managing the Covid-19 pandemic now could be on the table in the form of antiviral pills. On Friday, Merck and Ridgeback Biotherapeutics said their results (still not peer-reviewed) demonstrate their novel drug molnupiravir cut in half the rate of hospitalisation and death in persons with mild to moderate disease. If authorised by the US Food and Drug Administration for emergency use, the pill would become the first oral medicine to fight viral infection for Covid-19.
- The UK government has given the clearest indication yet that it will remove SA from its list of “red” countries that are deemed dangerous for travel because of Covid-19, something that will provide massive relief to the tourism industry ahead of the summer. The only outstanding issue appears to be the creation of a vaccination certificate that the UK government would deem “robust enough”.
- The SA Covid-19 Vaccine Certificate System has gone live, but it is still in a testing phase for a full launch in the days ahead. It became accessible to the public on Tuesday morning.
- While the economy slowly recovers from the lockdowns imposed to curb the spread of the deadly virus, restaurants are seeing the move to level one as a lifeline. As much as 70% of the restaurant business comes from the brief window of dinnertime trade, which means that being open for a few hours during this crucial period is a precious opportunity to claw back some of the catastrophic losses suffered by the industry since the start of this pandemic.
- According to Fitch Ratings, a robust economic recovery and better-than-forecast tax collection have boosted South Africa’s chances of achieving its fiscal consolidation aims. However, it has warned that this may not be sustainable, and there is still no space for government to meet new demands for increased spending.
- Manufacturing conditions slipped marginally in September, with business activity showing signs of strain, signalling that the sector could weigh on growth in the third quarter. Though it stayed in positive territory, the Absa purchasing managers’ index (PMI) slid to 56.8 index points from August’s 57.9 points.
- In environmental news, the Centre for Research on Energy and Clean Air has stated that Eskom has become the world’s biggest emitter of sulphur dioxide, a pollutant linked to ailments ranging from asthma to heart attacks. According to a report, Eskom produced 1,600 kilotonnes of the pollutant in 2019, the latest year for which comparable data is available. That was more than any other global company, and the total emissions of the power sector of any country except for India.
- Sasol is currently benefitting from higher oil prices that are, ironically, being driven higher by relentless lobbying by environmentalists that is pushing the oil price higher, causing the rush into oil shares, and making investors rich.
- Packaging producer Nampak’s lenders have given it nine extra months of breathing room to bring down debt by R1 billion in light of a pickup in its trading performance, further relaxing conditions on how debt must be handled. The news caused its share price to hit an eight-month high. Nampak, valued at R2.7 billion on the JSE, had gross debt of R5.8 billion to end-March, almost half of it dollar denominated. That had been racked up amid a push into Africa, with the group suffering the effects of hyperinflation and currency volatility in some of its markets.
Sources: Dynasty, BusinessLive, Bloomberg, Reuters, Fin24, NY Times, Global News, Telegraph, Moneyweb, etc.