Investment Insight
Bull or Bear market - United States shares
Conventional wisdom says shares are in a bull market once share markets are up at least 20% from the market’s low. (A bear market is typically thought of as a 20% drop from the high.) On 12 March 2020, the S&P 500 in the United States entered a bear market for the first time in 11 years, falling from all-time highs in just a few short weeks amid the global COVID-19 pandemic.
Just over five months on and the rally since late March looks like turning into a new bull market as shares look further into the future and anticipate a recovery. In all the Investment Team’s decades of experience, the volatility seen in the first half of 2020 has been unique in its violence and speed. Nonetheless, as we move into what is next on the investment horizon, we identify three factors effecting United States share markets.
The ‘Bazooka’
Since its unprecedented intervention in financial markets in March, the United States Federal Reserve (the Fed) has been the driver of financial markets, holding up share and bond prices through its massive stimulus programmes.
A quickly recovering economy, resulting from a COVID-19 vaccine, could be great for share prices but not for bonds. It has the potential to cause inflation, auguring badly for faster interest rate hikes.
Central banks everywhere are facing new pressures since the start of 2020. The market will be looking for assurances that Fed chair Jerome Powell is still prepared to do whatever it takes to keep interest rates low and asset prices flying high.
Health
We do not profess to be experts in medical advancement and vaccines. However, there appears to be enough evidence from respected sources to suggest some progress in slowing the spread of the virus and improving the outcomes of those infected with it.
In addition, human beings adapt to the changing environment – we wear masks, are diligent about washing hands, and adjust how we consume and live. Our job as investors is to adapt our clients’ portfolios to capitalise on the changes around us.
Politics
The delay in the New Zealand election is not in itself a driver of financial markets, but it is an indication of what COVID-19 has done to democratic countries’ ability to hold free and fair elections. An article in the New York Times read “this November, for the first time in our history, the United States of America may not be able to conduct a free and fair election and, should President Trump be defeated by Joe Biden, have a legitimate and peaceful transfer of power".
Notwithstanding the issues around holding the election itself, a Democratic Party sweep (winning the Presidency and the Senate) in the United States looks increasingly likely. This could have profound impacts on policy affecting several industries specifically around tax, climate change and healthcare. However, we would be fools to try and predict the outcome of the United States election.
In addition to domestic policy, geopolitical tensions with China have escalated markedly, and we are continuing to closely monitor the United States/China relationship. Interestingly, while trade and cooperation are becoming strained, opportunities for investing in industries in both countries as they each turn inwards and become more self-reliant, provides opportunities for New Zealand investors who can have a ‘foot in both camps’.
Forward looking
In the Investment Insight of 7 August 2020 | Performance Update, we discussed our pipeline of investment ideas for the remainder of 2020 and into 2021. We highlighted that buying shares is only one way to take advantage of market opportunities brought on by continued government stimulus, progress in vaccines and the Untied States elections.
Single sector or single geography share portfolios tend to perform well in an ‘all boats rise in a rising tide’ scenario. However, in an environment where the investment regime is ever changing, asset classes such as commodities, credit spreads, smaller United States companies, currencies and Bitcoin provide a diversified approach when share markets are uncertain.
We have taken profit on clients’ significant gold position, exiting around US$2,000/oz. Pleasingly this was done prior to gold giving up some of its gains. We remain overweight technology shares while also rotating into commodities, to take advantage of an increase in economic activity, and smaller United States companies which should benefit from a revival of consumer spending. Finally, with major banks now able to provide cryptocurrency custodial services, a small position in Bitcoin futures contracts provides a differentiated exposure to a weakening United States dollar.
A final thought – Bull or Bear?
Trying to time your investments to coincide with market tops and bottoms is rarely the best strategy. Keeping your portfolio aligned with your age and stage in life, with more frequent rebalancing in volatile markets, is a better way to reap consistent rewards. This is the power of technology and financial advice at NZ Funds.
Just over five months on and the rally since late March looks like turning into a new bull market as shares look further into the future and anticipate a recovery. In all the Investment Team’s decades of experience, the volatility seen in the first half of 2020 has been unique in its violence and speed. Nonetheless, as we move into what is next on the investment horizon, we identify three factors effecting United States share markets.
The ‘Bazooka’
Since its unprecedented intervention in financial markets in March, the United States Federal Reserve (the Fed) has been the driver of financial markets, holding up share and bond prices through its massive stimulus programmes.
A quickly recovering economy, resulting from a COVID-19 vaccine, could be great for share prices but not for bonds. It has the potential to cause inflation, auguring badly for faster interest rate hikes.
Central banks everywhere are facing new pressures since the start of 2020. The market will be looking for assurances that Fed chair Jerome Powell is still prepared to do whatever it takes to keep interest rates low and asset prices flying high.
Health
We do not profess to be experts in medical advancement and vaccines. However, there appears to be enough evidence from respected sources to suggest some progress in slowing the spread of the virus and improving the outcomes of those infected with it.
In addition, human beings adapt to the changing environment – we wear masks, are diligent about washing hands, and adjust how we consume and live. Our job as investors is to adapt our clients’ portfolios to capitalise on the changes around us.
Politics
The delay in the New Zealand election is not in itself a driver of financial markets, but it is an indication of what COVID-19 has done to democratic countries’ ability to hold free and fair elections. An article in the New York Times read “this November, for the first time in our history, the United States of America may not be able to conduct a free and fair election and, should President Trump be defeated by Joe Biden, have a legitimate and peaceful transfer of power".
Notwithstanding the issues around holding the election itself, a Democratic Party sweep (winning the Presidency and the Senate) in the United States looks increasingly likely. This could have profound impacts on policy affecting several industries specifically around tax, climate change and healthcare. However, we would be fools to try and predict the outcome of the United States election.
In addition to domestic policy, geopolitical tensions with China have escalated markedly, and we are continuing to closely monitor the United States/China relationship. Interestingly, while trade and cooperation are becoming strained, opportunities for investing in industries in both countries as they each turn inwards and become more self-reliant, provides opportunities for New Zealand investors who can have a ‘foot in both camps’.
Forward looking
In the Investment Insight of 7 August 2020 | Performance Update, we discussed our pipeline of investment ideas for the remainder of 2020 and into 2021. We highlighted that buying shares is only one way to take advantage of market opportunities brought on by continued government stimulus, progress in vaccines and the Untied States elections.
Single sector or single geography share portfolios tend to perform well in an ‘all boats rise in a rising tide’ scenario. However, in an environment where the investment regime is ever changing, asset classes such as commodities, credit spreads, smaller United States companies, currencies and Bitcoin provide a diversified approach when share markets are uncertain.
We have taken profit on clients’ significant gold position, exiting around US$2,000/oz. Pleasingly this was done prior to gold giving up some of its gains. We remain overweight technology shares while also rotating into commodities, to take advantage of an increase in economic activity, and smaller United States companies which should benefit from a revival of consumer spending. Finally, with major banks now able to provide cryptocurrency custodial services, a small position in Bitcoin futures contracts provides a differentiated exposure to a weakening United States dollar.
A final thought – Bull or Bear?
Trying to time your investments to coincide with market tops and bottoms is rarely the best strategy. Keeping your portfolio aligned with your age and stage in life, with more frequent rebalancing in volatile markets, is a better way to reap consistent rewards. This is the power of technology and financial advice at NZ Funds.
Source: FTSE Russell, Bloomberg.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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