Wealth Management: Market Perspective

Davids and Goliaths

Kevin Gardiner and Victor Balfour, Global Investment Strategists


Some financial talking points can be time wasters. The quantity theory of money; the demographic timebomb; “Austrian” theories of interest rates; Tobin’s Q – and our obsession with market flows.

Nobody knows exactly who is buying stocks and why. The market’s free float is large relative to the individual players, and the flow data are poor: incomplete, late and often proprietary (that is, potentially conflicted).

This differs from the bond market, where big, mandated buyers (liability-driven investors and central banks) are important. We have yet to see what happens when the economy pushes more strongly against those big buyers – we think their combined holdings will not keep yields down permanently. But they have clearly influenced bond prices to date.

So there may not be much useful to say about the shenanigans involving a US video game retailer and short-selling hedge funds. Stocks are certainly expensive, and the market has experienced some weaker days of late, but we would be surprised if retail chat rooms are where the future of the S&P 500 will be decided.

We should resist the human interest angle. Short sellers will never win popularity prizes: they bring liquidity, but also a hint of moral hazard. And who doesn’t relish the picture of the little guys finally sticking it to the man? But that picture may have been photoshopped, and one person’s financial revolution is another person’s concert party.

We hope the little guys were able to leave the burning building as quickly as they entered it. But we suspect that the episode will end in (lots of small) tears.

The wider stock market is hardly immune from bandwagons, bubbles – and busts. But as we see them, average valuations are high but not outlandish, particularly if earnings rebound (even) more strongly than we’ve been guessing.

This looks increasingly possible, despite the second wave – and new variants – of contagion. The forecasts sombrely unveiled by official institutions and reported with relish by the news factories do not fit with the latest data. In the US, business surveys are pointing not to resumed decline in the first quarter, but to strong growth. Pre-crisis levels of US GDP could be regained by midyear.

As a result, we think the main risk to stock markets comes not from chat rooms, or a renewed slump, but from an eventual rethink on interest rates. If earnings are growing briskly when that happens, the floor may be rising to meet us.

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