Market volatility a sign that investors are looking for excuses to sell off
Richard Harris says the skittish market indicates that the stable underlying economy has been priced into investments and it will take little to prompt a sell-off
The magic of the market means that quarters can take on their own special characteristics. The first quarter of this year has seen risk flood into the market, knocking over the bulls and overwhelming the best-laid plans of investors, economists and analysts.
I have spoken about the “Harris Law of Quarterly Investing” before. This is an observation that it is possible to predict a major turning point will occur at the end of a quarter. In reality, the vagaries of the markets are such that the trend of movement may be sharply upwards, downwards or indeed change very little from its course.
This may seem to be a deeply unhelpful indicator at first sight but, if you look long enough, it is possible to see that market behavioural patterns do come through roughly quarterly. January continued 2017’s steady, unspectacular, but continual rise. The turn came exactly a month late when the quarter spun into what a bad football pundit would call “a game of three halves”.
Having risen strongly since mid-2016, the markets have been casting about for reasons to sell off. First up was the “inflation frenzy” of February, followed by “Trump’s trade trash talk” in March, and to ensure that the quarter ended on a wobbly note, the “Facebook fears”.
It seems difficult to remember that the markets were worried about rampant inflation just two months ago. Since then, inflation has remained mysteriously muted, despite a Federal Reserve Bank meeting that talked about a Goldilocks scenario of higher economic growth than expected, lower unemployment than expected and low (albeit slowly) rising inflation. The underlying economy is definitely doing well – but how much of that is already in prices?
Well, after the rise in 2017, the market is deciding that quite a lot is – and is looking for different excuses to sell off. The fears that sparked the inflation frenzy have subsided. We still don’t really know why inflation remains low and muted – it seems that it shouldn’t, but let’s just accept it for the moment.
That excuse didn’t work enough to push the market down, so along came trash-talking Trump to vent about trade. He likes saying the unspeakable and that can lead to thought processes moving into new territory. He has brought into the open not that China’s exports are a problem – the US and China are the two biggest trading nations in the world – but that China’s highly restrictive import policies are a problem for all exporters to China. This is politically driven and stems from China’s insecurity about its rapid development. China will lose face if it opens up the economy today, so it won’t. This unmovable object meeting Trump’s irresistible force will mean that action is likely to follow the trash talk.
Let us run some numbers. US$60 billion of imports is equivalent to 12 per cent of China’s 2017 imports into the US; a US consumer will pay an extra 3 per cent – something, but not significant. For the US consumer, US$60 billion is just 2.6 per cent of imports so the tax will add a meagre one-third of 1 per cent to overall costs. This trade temper tantrum of Trump’s is unlikely to severely change economic behaviour in the short term. In the long term, it is in the interests of all sides to see Chinese import relaxations.
The Facebook fears are perhaps a little more important to the markets. It is unsurprising that, with access to the eyeballs of 27 per cent of humanity, Facebook became the sixth-largest listed company in the world. But a cavalier approach to privacy issues (shared by most other tech companies and governments) is very damaging. Facebook is no longer regarded as a safe haven but a resource for thieves and snoopers.
The worry is that today’s darlings of the stock market, the tech companies, will be favourites no more. But Facebook only does one thing; the other tech companies, Apple, Amazon, Microsoft, Google/Alphabet are too well entrenched in the economy of the future to be much affected – even by Trump.
Do excuses come in threes? Maybe more? It depends on what is needed for investments to catch up with their underlying value. The last time the market regrouped and consolidated, it took the whole of 2015 and 2016 to recover. But the Goldilocks’ economy is still travelling its course below, which is the only reason this looks like a regroup and not the start of a crash.
Richard Harris is a veteran investment manager, banker, writer and broadcaster and financial expert witness. www.portshelter.com