The opening week of February saw the largest ever weekly inflow of cash into global shares, according to Bank of America’s global research team, as well as the largest ever inflow into technology stocks. Of the total inflow of $58.1 billion into equities, some $25.1 billion or close to half flowed into US large-cap stocks, the second-highest figure on record, while $5.6 billion flowed into US small-cap stocks, the third highest figure on record. Technology stocks posted their best ever week of inflows at $5.4 billion, while flows into bonds reached $13.1bn, pushing the yield on US ‘junk’ or sub-investment grade loans to below 4% for the first time in history, despite a 33% increase in issuance compared with 2020.
We all know that financial markets are discounting mechanisms that look to ‘price in’ future events (and therefore trade off their perception of events rather than necessarily the reality of them).
However, it does look odd that the MSCI All Countries World index has hit new all time highs when there is still much uncertainty politically economically and on a health front.
The recent upsurge in the markets leaves investors to decide whether stocks are now overbought, overvalued and primed for a fall (or least some underperformance relative to other options) or capable of adding to a glittering run that is more than a decade old.
The bull case has three main drivers. The roll-out of vaccines leading to the opening up of economies. The pent up demand from consumers and corporations alike. And the continues fiscal and monetary stimulus unleashing a tidal wave of liquidity which will find its way to the stock market.
On the other hand, there are a number of counter arguments that lend themselves to the bear case scenario. The risk of new strains of Covid remains which can cause challenges to the vaccine roll-out schemes and cause a delay in the reopening of economies. Fundamentals will catch up to many stocks riding the momentum wave. Valuations are stretched, Robert Shiller’s cyclically adjusted cape earnings (CAPE) ratio puts US equities on a CAPE multiple of 33.7 times. The S&P 500 has only twice before traded at such elevated levels and they were 1929 and 2000, episodes which did not end well for investors.
On the valuation front, there is a further counter argument from the bulls that markets evolve over time, sometimes dramatically. The S&P 500 today is not the S&P 500 from 5 years ago, let alone 50 years ago. There is an element of truth to this and it does make intuitive sense when looking at businesses that make up indexes such as the S&P 500. But only time will tell who’ll be right.
So far the bulls are winning with the re-opening plays leading the way. Record inflows, having a stocks ‘always go up mentality’ and the stock market being the only game in town have all been factors contributing in market sentiment swinging from panic to optimism very sharply over the last few quarters. The fear that investors felt back in March has gradually morphed into a ‘fear-of-missing-out’ and various indicators of investor sentiment have surged to quite frothy levels over the last few weeks.
More economically sensitive, leveraged and asset-intensive shares have roared back into fashion whilst the shares of many of their steadier peers have lagged the market or even fallen back in price.
This has provided an opportunity to add shares in high quality companies. Ironically, it could be argued that these shares, listed here in the UK (which haven’t really taken part in the bull run) are outright cheap when compared to their peers. I have written about this before so won’t blab on here.
During the month of February, I bought the following shares using my monthly stocks purchase programme:
- GSK: Bought 25 shares at £12.70 each
- Sage: Bought 28 shares at £5.80 each
- RB: Bought 3 shares at £60 each.
- Unilever: I will do a separate post as I have been buying shares in this blue chip company hand over fist over the past month.
My focus on high quality, resilient and financially strong companies can appear overly careful during market phases such as this recent one.
Students of history will know, episodes such as this have come and gone many times over the years, and will come and go again. It is worth stressing that my long-term investment approach isn’t changed by them.
I view shares as fractional stakes in real companies rather than lottery tickets, and as I look ahead to 2021 (and the longer-term) I feel positive about the quality and resilience of the stocks I am adding. Buying them at attractive valuations is the icing on the cake.