3 Minute Market Update 31st January 2021

Markets fall despite impressive earnings beats in the US

Risk on the rise

Leaves the month flat after a volatile month for tech

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The Week That Was

Last week Apple beat already lofty expectations of record earnings by some 20% and ended the week down by almost 10%. With 85% of companies beating earnings estimates and the market falling during the week this was a common theme. Meanwhile, AMC Entertainment, a severely COVID affected cinema chain that is haemorrhaging cash with no end in sight, leapt 170% and at the time of writing is now worth 3 times as much as it was before COVID. The big picture is that markets were down for the week despite massive gains made by day-traders co-ordinating on the Reddit forum to attack short-sellers of specific stocks. The link between these anecdotes is the sense that the market is frothy, noisy and not necessarily being driven by fundamentals, even if we had any idea of what the fundamentals of the next 12 months might be. 

So when we look behind the enormous volume of column inches dedicated to AMC, Gamestop and other stocks being discussed on Reddit (fascinating as the commentary has been) it hasn’t really affected portfolio returns. So what has the market being trying to tell us about the investments we do own in the last week? The most significant move was in the VIX, a measure of expected risk, jumping from 23% to 33%. This tells us that traders estimate that there is now a one in 3 chance that the market will be 33% above or below where it is now in 12 months. When this measure increases it usually points more to the downside risks than the imminent likelihood of 33% upside. While the risk measure dissipates again more often than not it is worth keeping an eye on and so far it has only been associated with the 3-4% fall in markets we saw last week. At a sector level this looked like a sell-off driven by concerns surrounding the global economic impact of further lock downs with energy and material suffering the most and consumer staples stocks holding their ground both here and abroad. Another small oddity in the local market was that a number of local consumer discretionary stocks appear to have benefited form the heat that Reddit users have put upon US short sellers. Many of these stocks had been widely shorted because they are sensitive to deteriorating trade relations with China and local short-sellers also became nervous (when short-sellers reduce their positions they have to buy the stock to cover their position).     

Bond markets also sent mixed messages with even relatively risky high yield securities apparently holding up well while government bonds and higher quality fixed income sold off  as sentiment worsened into the end of the week. Commodities were mostly flat with the exception of certain agricultural commodities (wheat, soy and corn) ending 5-10% higher.

Looking at the month as a whole we had all the seasons of the economic cycle with the prospect of global recovery lifting cyclical industrials, consumer discretionary and energy stocks early in the month. As the COVID data worsened and expected interest rates fell in the 3rd week, tech stocks again assumed a supposedly defensive role in the eyes of investors and kept the market afloat. The last week had a more, end of cycle, stagflationary feel as the market appeared to contemplate the reality of expensive markets with potentially less respite from lower rates.  Tech and more value biased indices ended up in roughly the same place with the former exhibiting a great deal more volatility.  Commodity markets by and large saw the bright side of life and were mostly up between 5% and 10% for the month. During the month bond markets were remarkably quiet with modest losses from slightly higher inflation expectations for government bonds and high grade credit.