In today's Exponential Investor...- Who is in need of a holiday?
- Who is already on holiday?
- How does the holiday sometimes end?
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BRIGITTENAU, VIENNA One characteristic of summer (in Europe and North America at least) is that decision-makers like to put off decision-making.
Take the Bank of England's Monetary Policy Committee (MPC), for instance: it next meets on 5 August and then not until 23 September.
Across the Channel, it's a similar story for the Governing Council of the European Central Bank (ECB): its next meetings are on 22 July and 9 September.
In the United States, the Federal Open Market Committee (FOMC) meets on 27-28 July and then again on 21-22 September.
With central bankers on vacation – and the looming school holidays in England – in mind, this edition of
Exponential Investor looks at that time of the year which some people call the silly season…
… and three questions in particular.
1H21: a very busy period for the US Nasdaq stock market
One certainty about financial markets at the moment is that there must be a lot of people working for the US Nasdaq stock market – as well as a lot of lawyers and deal-makers advising companies – who are looking forward to a break from work.
1H21 saw a number of milestones for Nasdaq: the $106 billion raised in initial public offerings (IPOs – listings on that market) was the highest for a half year since 2008.
A press release of 29 June 2021 had an upbeat, perhaps triumphant, tone:
Of the 410 listings during the first half of the year, 167 were operating companies, representing a 77%-win rate in the U.S. market. Nasdaq also solidified its presence with Special Purpose Acquisition Companies (SPACs), welcoming 68% of all SPAC IPOs, raising $61 billion, and 61% of all SPAC business combinations, including SoFi (SOFI) and 23AndMe (ME).
Beyond operating companies and SPACs, 16 companies transferred their corporate listing to Nasdaq, including Honeywell (HON). Furthermore, Nasdaq held the largest direct listing among all exchanges, welcoming Coinbase (COIN) with $65 billion in market cap.
[…] More broadly, Nasdaq continued to be the leading U.S. exchange for technology, consumer and healthcare IPOs, with win rates of 62%, 66% and 92%, respectively. Nasdaq also continued to dominate biotechnology and pharmaceutical listings, winning 98% of all IPOs. Nasdaq has backed biotech companies for 50 years and counting, and we are proud to be the #1 exchange for healthcare listings.
Nasdaq's announcement touches on a number of topics which Southbank Investment Research's editors have written about in recent months.
For instance,
Frontier Tech Investor and
Revolutionary Trend Investor have looked at the key advantages of special purpose acquisition companies (SPACs), and have identified a company that could, over the long run, be an even larger player in the cryptocurrency world than Coinbase.
More crucially, though, a wave of IPOs is often a sign that stocks – and some technology stocks in particular – are less likely to perform well over the coming six-to-12 months than they have over the previous 12-18 months.
Traders are relaxed
In response to the economic/financial challenges of the Covid-19 pandemic, central banks and governments have created and spent huge amounts of new money.
Quite a bit of that money has found its way into stock markets: in US dollar terms, the MSCI World Index and the MSCI Emerging Markets Index (two widely used measures of stock markets in developed and developing countries) rose by 37.0% and 38.1% respectively over the year to 30 June 2021.
These gains, like Nasdaq's IPO boom, raise the possibility that stock markets are approaching (or at) some kind of peak – which is something else that several of Southbank Investment Research's editors have considered.
For now, though, stock market investors and traders are relaxed: figuratively (and/or literally) speaking, they are already on holiday.
Evidence for this comes from another big market in the United States: the Chicago Board Options Exchange (CBOE).
The CBOE has developed something called the CBOE Volatility Index (VIX).
The VIX is based on the S&P 500 index (a widely used measure of the US stock market) and the prices of options on the S&P 500 index that are due to expire in the near future.
Together, these give an estimate of volatility in the S&P 500 index over the next 30 days.
If the resulting measure is high, it suggests that investors and traders are fearful about the near-term future for the US stock market.
For this reason, the VIX is sometimes known as the "fear index".
Conversely, if the VIX is low, investors and traders are relaxed.
| Investors and traders are on holiday for now |
In mid-March last year, when the Covid-19 pandemic was having its greatest impact on stock markets, the VIX peaked at over 80.
Now the VIX is at 17, or only a little higher than it has been for long periods over the last decade.
The message from the VIX is that investors and traders are focusing less on work and more on play.
However, that may lead to complacency, or worse…
The Black Swans of 1990 and 2001 revisited
In July 1990, my senior colleagues at the international asset management company where I worked were very relaxed about global stock markets.
Many of them were thinking about holidays on a beach – or already there.
Day after day passed in which their market reports included the phrase "summer lethargy" to describe what was (not) going on in the US and the UK stock markets.
And then, on 2-4 August 1990, the army of Iraqi dictator Saddam Hussein invaded Kuwait.
It was a Black Swan event – one that came completely out of the blue.
| Summer holidays ended early in 1990 |
The S&P 500 slumped quickly from around 360 in mid-July to 300, but had regained the ground that it had lost by February 1991: the S&P 500 rose gradually to nearly 450 in July 2003.
The "9/11" attacks on the World Trade Center in New York City on 11 September 2001 was another classic example of a Black Swan event.
| 9/11 did not change the trend |
The attacks produced a sharp sell-off and a quick rebound in an S&P 500 index that was on a downtrend from 1,500 in August 2000 to 800 or so in September 2002.
The quite different impact on the S&P 500 index from these two Black Swan events provides two major insights.
One insight is that big picture economic and financial trends matter much more to stock markets than catastrophes that strike from out of the blue.
Through the early 1990s, the S&P 500 index performed in a fairly lacklustre way because the US economy was slowing.
According to the International Monetary Fund (IMF), real (after inflation) GDP growth in the United States was 3.67% in 1989 and 1.89% in 1990.
The economy actually contracted by 0.11% in 1991.
Roughly a decade later, real growth slumped from 4.75% in 1999 and 4.13% in 2000 to just 1.00% in 2001 and 1.74% in 2002.
However, there was an additional problem, which had not existed back in 1990-91.
Prices of a number of leading technology media and telecommunications (TMT) stocks were under pressure following the bursting of the speculative bubble of the late 1990s.
Together with the softness of the US economy, this was why the S&P 500 nearly halved in value over the two years to September 2002.
The second insight from the Black Swan events is that summer holidays sometimes end in very unexpected ways…
… with the result that decision-makers have to race back to their desks.
Until next time,
Andrew Hutchings
Managing Editor, Southbank Investment Research
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