December 10 2021This week saw the release of US inflation, with the annual rate hitting 6.8% in November, the highest reading since June 1982. This marked the 9th consecutive month that inflation has been above 2%. Inflationary pressures were reportedly seen across the board, including energy, shelter, food and vehicles. Whilst the figures were in line with forecast, inflation continues to surprise to the upside by reference to the Citi Global Inflation Surprise Index.
With inflation surprising to the upside the expectation that interest rates will rise remains. This is leading to short yields rising. Long bond yields however do not appear convinced that inflation is here to stay. Instead they appear more concerned that economic growth remains under threat. For that reason we are seeing the yield curve flatten at present.
The higher level of inflation, coupled with lower earnings yields on US assets, means that the latter now trade on negative real yields, including equities and high yield bonds. This to some has left US assets very much in the expensive camp, including US Treasuries and the S&P 500. Whilst earnings growth is rolling over from its recent peak, other market commentators point to the still strong level of growth which we are currently seeing. For that reason we are seeing a wide range of forecasts for the S&P 500 investment banks, ranging from a low of 4400 from Morgan Stanley to a high of 5300 from the Bank of Montreal. The average from 11 banks comes in at 4914, which equates to a gain of 5.3% from the close of 4667 on the 09 December.
This week we have seen a numerous research pieces on technology. One such piece was looking at Cathie Wood’s ARK investment vehicle. For those unfamiliar with this, it aims to provide broad exposure to disruptive innovation companies. This includes companies centred around artificial intelligence, robotics, energy storage, DNA sequencing and blockchain technology. These companies performed exceptionally well following the low point caused by COVID. More recently however we have started to see some of this performance unravel sharply. The analysis shows that performance is showing a very similar path to that of the Nasdaq during the dotcom crisis. Fingers crossed that history is not repeating itself.
Looking at the Nasdaq, the gains have been strong at the index level. This however masks price action underneath, whereby if we exclude the 5 biggest stocks, the index is actually down in excess of 20% in the year to date. Relative to the broader market, the technology sector is also at levels not seen since March 2000. A similar picture can also be seen relative to the Dow Jones.
I think we could all agree that technology is in a very different place to what it was in the late 90’s and early 2000’s. That does not mean that exuberance can’t take hold in certain areas of the market. As always, selectivity will be key. To quote EA Bucchianeri, “Isn’t it strange how people are selective about the truth they want to see or hear.”
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