What caught my eye this week.
All of us know that a calendar year is an arbitrary period over which to measure non-astronomical progress. That’s true whether you’re looking at an expanding portfolio or a shrinking waistline. Or, worse, the opposite!
Yet 90% of us do it anyway.
Far be it from me to take the high ground here. Not when one of my favourite rituals of the quiet New Year is resetting my return tracking spreadsheet.
I love pressure washing the slate clean. Percentages gained and lost and my benchmarks are zeroed. So too is the chunky annual expense tally that’s racked up by my naughty active style.
I try to be happy that my transaction taxes pay for a new nurse somewhere, and resolve to do better.
I also resolve to eat less fried food, and to read more books and fewer Tweets.
We’ll see.
Money for nothing
If tracking annual returns is illogical, forecasting them is insanity.
Yet plenty of well-paid professionals do that, too.
As a financial media junkie, this time of the year sees me digest a hotpot of forecasts from everyone from hedge fund managers and market strategists to bank interns.
They aim to pin the tail on a donkey, by predicting where the world’s biggest stock market indices will sit in exactly 12 months.
Such precision is, of course, errant nonsense.
Nobody knows where the market will be tomorrow, next month, or in a year. Most market prediction methods don’t predict much of anything. Animal spirits loom large – not to mention pandemics caught from animals.
True, over the very long-term GDP growth and stock markets are related in healthy economies. Prices of assets ultimately follow earnings. The price you pay affects the returns you get, so valuation does matter.
But ‘ultimately’ is doing a lot of heavy lifting there. Think decades.
Short-term, anything can happen. For example, consider how the immense contraction in GDP in early 2020 foreshadowed a boom in shares. Nobody saw that coming. Just saying the world wasn’t ending felt contrarian enough.
Still, I’ve also mellowed about these market forecasts. It helps that wider scrutiny via the Internet means fewer people take these horoscopes as gospel nowadays.
Most market mystics just slap roughly 10% on to wherever the stock market sat at the end of the year just passed and call it job done. And in truth that’s about as good a guess as any.
There are more important things to be cross about than pragmatism.
Sultans of swing
Where the pundits do spin stories to justify their +10% forecast – beyond it being an (optimistic) historical near-norm, twiddled for inflation – you can also get an insight into what’s driving the big money.
It’s similar to how some stock pickers start with a company’s market cap, then work back to see what assumptions are being made about its earnings and growth. You can do the same with these wider prognostications.
In an era where people are flipping blockchain-ed JPGs of cartoon monkeys for millions of dollars on a daily basis, thinking about how the stock market might move over a long 12-month period – and why – seems almost sagely.
Right now investors seem to foresee rates rising, but at a moderate pace. Real yields are expected to remain low, historically-speaking. Quantitative tightening (yep, it’s a thing) should eventually drain some liquidity from the system, but it’s thought more normal economic conditions will pick up the slack. Crucially, inflation isn’t expected to run hot indefinitely.
That summary might not sound like anything to scare the horses. But it’s already been enough to crash the highly-rated ‘disruptive’ growth stocks that boomed during the pandemic.
As Michael Batnick points out:
The story that best encapsulates investor enthusiasm for growth stocks was when Zoom’s market cap crossed ExxonMobil [XOM], which traces its roots back to 1870.
When Zoom went public in 2019, XOM was 21x the size. And then, for one brief moment during the pandemic, Zoom took the lead. After the recent growth crash, Exxon is now 5.5x larger. Order has been restored to the galaxy.
Multiple compression has done a number on these stocks. The median price to sales ratio for ARKK names peaked in February at 33 (Zoom got up to 120) and is now down to 10.5.
So much for the highest-fliers. If anything they’re starting to look more like buys than sells to my spidey senses, if you’ve a long enough time horizon.
Your latest trick
A question mark also hangs over what we used to call ‘bond proxies’ in the old days. (You know, those ancient times before March 2020).
These are the high-quality, slower growers like Nestle and Diageo. The sort of companies beloved of star fund managers Nick Train and Terry Smith.
Shares in many such firms have been stagnant for a while but – especially outside of the UK – their valuations remain largely unattractive on a historical basis. Yet the same financial modeling that sees higher yields compressing racy tech stocks should also imply lower multiples for these chocolate makers and whiskey merchants, albeit not to the same degree. I’m watching these companies very closely for clues.
Then finally we have the value stocks – banks, miners, energy firms and the like.
The presumption is rising rates, inflation, and economic growth are good for these because future higher earnings aren’t so valuable as they are in a low-growth, low-yield world. Hence the market sees more rotation into such companies.
For what it’s worth (nothing) I’m not so sure. A lot of assumptions underpin that trade. I find it hard to be confident of an economic boom, with Covid still raging a year on from vaccine euphoria. I believe too that supply chains and consumers alike are getting better at dealing with the pandemic’s impacts. That’s one reason I don’t see high inflation persisting.
Brothers in arms
It’s possible – especially in European markets, which has less of a growth and tech focus – that money could continue to rotate from one kind of company and into another, and the market still head higher.
Individual fund manager or factor returns could crater, depending on style. But index investors might barely feel a flesh wound.
So will the market go up in 2022? Your guess is as good as mine.
Instead of an unsatisfactory answer, a better question: which market?
This graph from Visual Capitalist illustrates a wide variety of moves across asset classes in 2021:
That’s from the perspective of a US investor, but the message is universal.
Diversification potentially gives you more leg-ups and safety ropes in an uncertain future. Whereas betting on just UK value shares or US software-as-a-service or whatnot – or even only shares or cash – is exactly that. A gamble.
If you want more soothsaying for the year ahead, try Saxo Bank’s annual outrageous predictions. They’re tongue-in-cheek, and interesting.
Happy 2022!
