Market briefing – 5th August 2020

Since the bear market started on 21st February 2020, recent European trading sentiment declined after the EU’s €750 billion rescue-package had sparked early positivity⁽²⁾, when European traders reviewed the details of the eurozone funding deal, which we can see in the graph below…

Source: FE Analytics⁽¹⁾

In the UK, albeit falling towards the end of the week, London markets were looking forward to US Secretary of State Mike Pompeo’s arrival in London, and the potential US-UK trade talks that might follow, which in part caused sterling to continue its rise against the dollar⁽³⁾ to levels not seen since immediately before the bear market started.

The US saw markets looking more positive as the daily figures for new confirmed Covid-19 cases went below 60,000, although by the end of last week this had again risen back above 70,000⁽⁴⁾ which saw the markets fall away. But the big news in the States was how the ‘fab four’ reacted to being quizzed by a U.S. House of Representatives Judiciary Committee.

“Computers are useless…”

The CEOs of Amazon, Google (owned by Alphabet), Apple and Facebook appeared, via screen, in front of US congressional lawmakers and were asked whether their firms were too powerful. The hearing followed a year-long investigation by a US House of Representatives Judiciary Committee into what critics have christened ‘Big Tech’.

For these four corporate leaders, the issue of their companies’ dominance comes at a time when an economic catastrophe caused by a pandemic has seen businesses, large and small, wiped out, while $billions has been added to the value of theirs.

The US House Judiciary subcommittee on antitrust (monopolies) has been tasked to answer the question of whether these firms are too big and prevent competition. The CEOs were relentlessly quizzed with hostile questions about their business practices in a hearing that lasted for more than five hours. What would be the impact on their respective share prices of appearing in front of such a hostile crowd?

Picasso may not have seen the benefit of computers, but with the four companies reporting on the same day for the first time, all of them saw their stock prices go higher.

Together, the four account for nearly 20% of the S&P 500’s⁽⁵⁾ stock market value. Index funds tracking the S&P 500 and tech-heavy Nasdaq⁽⁶⁾ rose. Due to millions of Americans ordering online and having items delivered during the COVID-19 pandemic, shares of the largest U.S. technology companies have hit record highs in recent months.

The coronavirus pandemic has seen economies contract in percentage terms in degrees not seen since the Great Depression just under a century ago. However, expectations that these companies with massive cash reserves will emerge from the coronavirus crisis stronger than their smaller competitors is extensive, being reflected in their share prices. As can be seen from the graph …

Source: FE Analytics ⁽¹⁾

… from the start of bear market on 21st February, the technology sector (as shown by the Nasdaq purple line), which includes these four firms, has recovered remarkably; at a time when the S&P 500 remains below water, and the UK’s FTSE 100⁽⁷⁾ is still well adrift from its pre-bear market value.

Massive cash reserves and the pandemic-fuelled increase in web based online activity by consumers worldwide are some of the reasons behind these stellar returns, which as the graph below shows, has been sustained over the last decade.

Source: FE Analytics ⁽¹⁾

Apple has delivered year-on-year revenue gains, as consumers working and learning from home during the COVID-19 pandemic turned to its products and services. Amazon has posted some of its biggest profits in its 26-year history as online sales have surged. Whilst Facebook has reported increases in revenue, Alphabet, Google’s owner saw quarterly sales fall for the first time in its 16 years as a public company. However, advertisers stayed with Google, the most popular online search engine during the pandemic, meaning the fall was nowhere near what was expected ⁽⁸⁾.

What should this tell you

On the surface it would appear that the current ‘Big Tech’ stocks will remain in place for decades. But is this necessarily true?

As is often written, “past performance is no guide to future returns”. Just because a stock, fund or portfolio has done well in the past, does not mean it will do so in the future.

As can be seen from the table below, the amount of change within the S&P 500 of the top ten companies by market share since 1980 is significant; proving that past performance really is no guide to future returns…

(*) Alphabet owns Google
Sources: ETF database⁽⁹⁾ and Investopedia⁽¹⁰⁾

More broadly then, investors should diversify, not only across individual stocks but across different asset types (i.e. bonds as well as equities, etc.), investment styles (i.e. active management and passive investing) and different investment philosophies (i.e. growth and value).

While individual stocks and markets will continue to go up and down, smart diversification across assets, styles and philosophies can help investors minimise their risks. Although it does not guarantee against loss, smart diversification is the most important component of reaching long-range financial goals while minimising risk.

However, remember that no matter how diversified a portfolio is across asset types, investment styles and philosophies, risk and reward do typically go hand in hand and as such risk can never be eliminated completely.

It is true that the short-term horizons shown in some of the graphs above enhance the uncertainty due to the unpredictability of this current situation. However, it is important to remember that we very often have a long-term investment time horizon.

As we have said before, we will continue to monitor the current financial situation and keep you notified of any changes that are made. Please seek professional financial advice if you wish to discuss your financial situation further.

Sources

⁽¹⁾ FE Analytics

⁽²⁾ The Telegraph

⁽³⁾ Currency charts

⁽⁴⁾ Our world in data 

⁽⁵⁾ The S&P 500 or Standard & Poor’s 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The index is widely regarded as the best gauge of large-cap U.S. equities. Other common U.S. stock market benchmarks include the Dow Jones Industrial Average or Dow 30 and the Russell 2000 Index, which represents the small-cap index – https://www.investopedia.com/terms/s/sp500.asp

⁽⁶⁾ The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange. The Index’s composition is nearly 50% technology, with consumer services, health care and financials the next most prominent industries – https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp

⁽⁷⁾ The Footsie is an index that tracks the 100 largest public companies by market capitalization that trade on the London Stock Exchange (LSE). The FTSE 100 represents roughly 80 percent of the LSE’s market capitalization. FTSE is an acronym for the Financial Times and the LSE, its original parent companies. The FTSE is now owned and maintained by the LSE. It has similar importance in London to the U.S. Dow Jones Industrial Average and S&P 500 and is a major indicator of the performance of the broader market – https://www.investopedia.com/terms/f/footsie.asp

⁽⁸⁾ Market Screener 

⁽⁹⁾  History of the S and P

⁽¹⁰⁾ Investopedia 

This publication is marketing material. It is for information purposes only. This statement is for the sole use of the recipient to whom it has been directly delivered by their Foster Denovo Partner and should not be reproduced, copied or made available to others. The information presented herein is for illustrative purposes only and does not provide sufficient information on which to make an informed investment decision. This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. Potential investors will have sought advice concerning the suitability of any investment from their Foster Denovo Partner. Potential investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and they may not receive back the amount they originally invested. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.