Week Ended November 12th, 2021
“The secret to investing is to figure out the value of something – and then pay a lot less.” Joel Greenblatt, Managing Principal and Co-CIO of Gotham Asset Management
Volatility returned to the equity and bond markets this past week, related to mixed earnings and a spate of corporate news, as well as to higher-than-expected inflation data in the US. Nonetheless, US equities rediscovered their mojo on Friday and managed to limp into the close with losses for the week that could have been a lot worse had tech stocks in particular not somehow repelled the mid-week hot inflation data.
Let’s start with corporate news. The week started with the bizarre decision by Elon Musk last weekend to poll his Twitter followers to see if they favoured him selling 10% of his holdings in TSLA.
As you can see in the extract from Twitter, his faithful followers voted “yes”, and Mr Musk followed through by selling an estimated $7 billion of TSLA stock during the week. Naturally, this Musk-ploy put pressure on TSLA shares, which remain (in my opinion) significantly overvalued anyhow. The shares declined 15.4% W-o-W to finish Friday at $1,033.42/sh. COIN also missed its consensus estimates, driven by – you’re going love this – too little volatility in the cryptocurrency market. Still, COIN settled and actually finished the week higher W-o-W although off of its pre-announcement highs on Tuesday. (COIN’s management discussion after results was excellent FYI.) Other names in the news included: ABNB surprised with 3Q21 results on the upside (here); DIS missed 4Q21 revenues and earnings badly (here); DASH announced the acquisition of Finnish food-delivery company Wolt for €7 bln (all stock, here); GEannounced it would split into three listed companies (here); Rivian (RIVN) went public and the price skyrocketed post-issue (here); JNJ announced Friday that it too would split its company into two separate listed companies, one pharma and one consumer (here); and in the UK, retailer M&S delivered stellar semester results causing the shares to increase 22% W-o-W (results here). I have to also mention SHOP, up 12% just on Friday based on no news (that I could find)! As an investor, that’s nice. However, seeing SHOP being taken up by the Reddit and Twitter crowd makes it feel to me like it’s leaning towards joining the meme stock crowd, and that is not something I like. More generally, if you wish to read a good summary of where we stand in this earnings round with 459 of the S&P 500 companies having now reported, check out the excellent summary from Refinitiv here.
As corporate earnings and news was trickling in, a fragile stage was being set for the release of CPI in the US before the market opened on Wednesday. CPI for October was 0.9% (vs 0.4% in September), or 6.2% for the trailing 12 months, the highest since November 1990. Core inflation (ex-food, ex-energy) for the 12-month period ended October was 4.6%. The simple reality is nearly everything is getting more expensive, and this is true not just in the US, but in most other countries, too. The October CPI report from the BLS is here. CPI perhaps shouldn’t have been that much of a surprise since PPI had come out the day before at 8.6% through October (6.2% ex-energy, ex-food). There is a lot of detail in the BLS PPI report for October, which you can find here. Again, energy was one culprit but prices of goods and services were higher across the board, more pronounced in goods. The bond market puked on this data, pushing yields higher and whacking equities – especially the rate-sensitive tech stocks – on Wednesday. Nonetheless, as the data was digested and accepted as the week wore on, bond markets remained orderly and equity markets stabilised. The Fed’s narrative of transitory inflation (however you wish to define the term “transitory”) seems to be sinking in, as investors shrugged off the hot inflation data. Also, financial assets continue to run (thanks Fed) even though economic data remains mixed. Consumer sentiment in the US slipped to a 10-year low on Friday due principally to inflation concerns, according to the University of Michigan consumer sentiment poll (here).
Before turning to market performance last week, Goldman Sachs published its Global Macro Outlook 2022, and it’s worth a read if you have time. Here’s the summary of growth projections for major economies from Goldman Sachs for 2022.
In global equities, the US equity market (S&P 500) was the worst performer last week of the indices I track, whilst emerging markets were unusually the best. I read a transcript of an interview with two Goldman Sachs researchers (Timothy Moe and Sunil Koul) that raised an excellent point about the MSCI EM index, the benchmark index for emerging markets equities. The analysts pointed out that the weight of China in the MSCI EM index had increased from 20% in 2015 to a high of 43% in 4Q2020. Given the dominance of China in this index and the rapid development of China, they are suggesting that we need an MSCI EM ex-China index, which I think is an excellent idea. Here are returns for the global indices last week.
In US equities, the S&P 500 had the best relative performance amongst the indices I track, whilst the Russell 2000 (small cap proxy) had the worst. The NASDAQ was down but not significantly given the mid-week CPI print, which weighed heavily on bond yields and would normally be a more negative influence on the tech-heavy index. As I mentioned earlier, tech investors seem to be getting used to inflation, signalling that they believe it will indeed be transitory.
US Treasuries were the wrong place to be last week, as October’s inflation data wrecked the US government bond market. Yields backed up significantly across the curve, with the yield on the 2-year UST heading back out to 0.53% (+14bps W-o-W), and the yield on the 10-year UST finishing the week at 1.58% (+13bps W-o-W).
Government bonds also weakened in the Eurozone, the U.K. and Japan, with yields widening in all three jurisdictions as inflation concerns remain.
Gold has its biggest one week rally since early May and its second best week of the year, rallying 2.8% on the week. It might be easy to default to inflation concerns as the driver, but I am not so sure given the behavior of other asset classes, particularly equities which didn’t really seem to care that much. I believe that the increase in gold prices could just as easily reflect growing geopolitical risks, particularly tensions on Ukraine border Of course, not to be outdone by “old school” gold and fighting to claim its stake as the better inflation hedge, Bitcoin was up 4.8% W-o-W, outshining gold.
The price of oil weakened this past week, for the first time in several weeks. I am not sure why, because the macroeconomic environment as far as oil looks the same as it did last week at this time. The U.S. Dollar kept doing what the greenback has been doing - heading higher. The stronger US Dollar is starting to weigh on Sterling and the Euro, as both have been weakening now steadily since hitting recent highs in June.