Weekly Market Update: Santa rally, or not, we remain equal weight
Mon 25 Oct 2021
Market Update
Equities in most major markets posted gains last week with global stocks up +1.4% in Sterling terms, amid stronger investor sentiment. US stocks were up +1.7% as positive earnings surprises continued for a second week in a row. EU stocks were up +1.2% despite heightened concerns that a rate hike could come sooner than expected, while UK stocks were down -0.4% as the latest inflation readings remained above the BoE’s 2% target. Globally, most sectors posted gains with healthcare and utilities being the best performing, while materials and telecoms underperformed. The US 10Y Treasury yield was up 6.2bps finishing the week at 1.632%, while the UK 10Y yield was up 3.9bps reaching 1.145%. Sterling remained flat against the US Dollar. In US Dollar terms gold was up +1.4%, while oil was up +2.9% reaching $84 per barrel.
CIO Analysis
Global equities are back up again near all-time highs, on the back of another very strong US earnings season. With nearly a quarter of the S&P 500 having reported, more than four out of five companies in the world’s leading equity benchmark have beaten analysts profit estimates. From a technical perspective things are looking auspicious for another ‘Santa rally’ which traditionally takes place in November or December.
Then why do we retain our equal weight in equities? Because, beyond the next few months, risks appear fairly elevated.
For one, we think that a fair amount of fiscal easing is priced in and politics may disappoint. Intransigence persists in Washington and there’s no certainty that Joe Biden’s $3.5tn plan will pass in full, or even that Democrats will retain their razor-thin majority vote in the Senate after December. Fiscal easing is not a given even across the Atlantic. This week’s UK budget is rumored to include tax hikes. In Germany, the incoming coalition leader, Olaf Scholz is now faced with fiscal concessions to acquire a working majority.
Second, we are at the final legs of this round of Quantitative easing, and accomodation going forward may not be as easy as in the past . The existence of inflation makes ultra-accomodation at the push of a button a more difficult proposition, as beating inflation and underwriting risk could be seen as competing targets. Should the Fed opt to fight inflation, the ‘Fed Put’ could be compromised. Should it persist with accomodation at the face of spiking prices, it’s perceived ability to adhere to its inflation mandate could be undermined. This tells us that the last twelve year’s paradigm, at the very least, is at risk.
Third, while earnings look good (this proposition will be put to the test this week), as supply chain pressures persist, future earnings become more precarious. This holds especially true for mid and smaller caps, as well as many non-listed high-street firms which are exposed to supply chain disruption but don’t have the gravitas to pull ahead of the queue or the pricing power to withstand margin pressures.
History tells us that as long as Quantitative Easing remains in effect, being underweight risk is not a good idea. We feel, however, that at this particular juncture, risks are elevated enough to merit a more cautious medium-term approach.
David Baker, CIO
