October 2021

Another month is nearly over, the end of another quarter. Q3 was definitely an “interesting” one, at least when viewed through our market-tinted rear-view mirror.

The S&P 500 index had closed June 30th at 4,297 and as we write, it is at 4,353, or a gain of about 1.30% whilst the NASDAQ Composite has come from 14,503 to about 14,546, for a gain of 0.30%. The DJIA shows a loss of about 0.60% for the period, coming from 34,500 to settle the quarter at about 34,300.

The VIX, “The Fear Index”, has risen from a 15 level at the end of Q2 to about 22 at the end of Q3. WTI oil has had a clearer path for the year, having risen from $48 or so at year-end 2020 to about $75 now, much as it closed Q2. Much talk of inflation, rattling the interest-rate market, knocked us about; yet, at the end of the quarter we are much in the same place. Clearly, we took the bumpy road to nowhere in Q3... The US$ as measured by the DIXY (trade weighted index) advanced a little from 92.44 to 93.85 as the Fed seems a little less dovish than the other central banks. This shows roughly a 4% increase year-to-date... Gold is essentially where it was on June 30th, but down some $150 per ounce (-8% or so) since year-end 2020. A hedge against the rampant inflation so many had predicted. Hmmm... Bitcoin didn’t go to $100,000 either... As Albert Einstein had said, “Making predictions is very difficult, especially about the future...”

On the political front we observed the failings of President Biden in the USA, who stumbled on Afghanistan and keeps tripping on infrastructure projects and holding his own party in check when he wants debt ceiling support etc.! Xi in China, trying to demonstrate the Communist centralised doctrine’s superiority is also stumbling. In his attempts to rein-in the power of the economy and the moguls, he has managed to destroy much capital and some of the goodwill China had earned. Economics 101... Government intervention is rarely efficient, (see huge housing build in China as a corollary!)... Between the two presidents jumping up and down on our market trampoline, it is quite amazing that nothing happened...

All this nerve wrecking activity coming on the back of excellent Q2 results, handily beating expectations, or so we were told. The markets demonstrated to us that the actual results had already been properly baked-in to the valuations, ahead of the information. As the adage says: “Too little information and you’re blind, too much and you’re blinded...”

That is what was. When driving, we look forward and just glance occasionally in the rear-view mirror, so let us try to look forward from here: We are about to enter earning season yet again. We think that analysts will yet again be trumped by the reported reality, and we expect more stellar results to make us smile, but not necessarily wealthier...

We sense that the economies of the world have adapted to the constraints of the Covid pandemic. This is likely to be our mettle for the foreseeable future and part of the difficulties all businesses must confront. Next! Our outlook remains mostly unchanged – we remain positive on equities in general and therein, we keep our preference for tech and life sciences. We also believe in the energy sector which remains both cheap to asset values and high yielding (5% dividend yield on Exxon?). We remain cautious on bonds of all qualities and maturities, as we sense an increased probability of rising yields, albeit to modest levels. There isn’t enough yield on offer to offset the risks of capital losses.

Then, in observing the new Spring collections we see a rather dramatic shortening in skirts and dresses. The old “hemline/index theory” demonstrates that the movements of the S&P 500 index have a high correlation with the direction of the hemlines. The return of the micro-mini may be pointing to a large rise in the equity indices. But even if the theory doesn’t hold true this time, maybe bellbottoms will come back into fashion and our long-closed closets will come back into fashion!

A thought from Alphonse Karr into Q4 – “Some people are always grumbling because roses have thorns; I am thankful that thorns have roses”.