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Client Update - 26th January 2024

Can US President Joe Biden fight off the resurgent force of Donald Trump? Currently it looks unlikely, however the US economy grew at an impressive 3.3% annualised rate during the final quarter of last year, capping off a strong 2023 that defied recession fears. This prompted Biden to attempt to claim credit. The figures pointed to the US economy’s remarkable resilience in the face of the Federal Reserve’s sustained campaign to snuff out inflation with higher interest rates — and encouraged investors who believe the central bank will cut rates in the coming months.

 

"Buy the rumour, sell the fact" is a widely used phrase amongst professional investors and City traders alike. It describes a recurring pattern within financial markets, driven by human behaviour. What exactly does this phrase mean, you may ask? When there is an expectation of good news related to a company, sector, or region, it often garners widespread attention and speculative buying ahead of the expectation being actually confirmed. The more widely the speculation becomes known, the more speculators buy in the hope of selling after the positive news at a profit. However, very often once the news is officially confirmed, the investment goes down, leaving many puzzled by the market's seemingly contrary response to the news. If everyone knew that that good news was coming, who is left to buy? Bonds have rallied on the hope of interest rates cuts being not too far away, although recent commentary from the US Federal Reserve has questioned exactly how soon this will actually come about.

 

In the last few weeks, Bitcoin has provided us a good example. Fuelled by expectations that the U.S. Securities and Exchange Commission (SEC) would approve a new Bitcoin Exchange Traded Fund for the first time. The perceived “wisdom” was that an easily accessible Bitcoin product would lead to broader cryptocurrency adoption by both institutions and individual investors. This anticipation did indeed drive Bitcoin to a two-year peak on January 11th, when the SEC officially confirmed this. Investors wasted no time in offloading their Bitcoin positions after the event, resulting in a sharp 20% drop in Bitcoin's value. Within a highly speculative unregulated asset, this sort of manic price action should be expected and is a key reason we do not hold crypto in our client portfolios.

 

As we look across global markets, the biggest “buy the rumour” trade is undoubtedly in the Magnificent 7 stocks. The euphoria around Artificial Intelligence (AI) has created a subset of very large and highly valued companies. Only last week I shared my scepticism that investors would not have unlimited patience if the anticipated AI related earnings did not materialize. A week later it looks likes the Magnificent 7 may be down to 6.

 

Tesla is a member of the AI club, though why an electric car and solar power company should be so closely associated with AI was always a bit of a puzzle. Tesla reported weak earnings yesterday and patience immediately ran out for one of the Magnificent 7. Tesla CEO and founder, Elon Musk, stated that volume growth "may be notably lower than the growth rate achieved in 2023.”  He also took the highly unusual decision to not issue guidance for full year earnings. This leaves Tesla shares trading on 68x earnings per share, or 4 times more expensive than the average global company.  Facing the prospect of low or zero earnings growth this year, investors have voted with their feet and Tesla fell 10% the day after earnings.

 

The lessons of the last few years (and weeks) shows that sensible, reliable, and proven approaches to investment can prove more effective that trying to time the market or play short term themes. We believe markets will reward common sense over hype and over-valuation over the coming months. Do have a good weekend.

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