New article from Tatton Investment Management: 'Risk on' pauses while the real world keeps accelerat

23 April 2021

Equity markets finally paused in their upward trend this week, with the most speculative assets like Bitcoin experiencing their first serious setback since February. It was hard to pin the cause on any one specific development, although falling oil prices got their share of blame. The earnings season was certainly not at fault, with reported sales and earnings growth in the US outstripping already optimistic expectations, while bond market action likewise continued its newfound supportive stance that we wrote about last week.

More likely it was a more general dampening of investor sentiment in the face of increasingly cautionary reports from investment bank analysts about overheating markets, alongside a powerful resurgence of COVID in India. Plus, there were headlines on tax hikes for investors, as well as mounting levels of government intervention in the free market economy to slow the climate crisis, and even an abortive football ‘coup’ of sorts. We cover the intervention aspect in a separate article this week and discuss the news on investor taxation here.

On Thursday, unconfirmed but very plausible, news emerged that the Biden administration is proposing to tax the capital gains of US citizens whose annual incomes already exceed $1 million at the top ordinary income tax rate of 39.6% (43.4%, adding the existing 3.8% tax on net investment income tax which is ostensibly for Obamacare). This is seen as an opening gambit and Goldman Sachs expects Congress will settle on a more modest increase of around 28%, probably effective from the start of 2022. This tax hike is really aimed at business owners and top executives, who use shares as a way of paying themselves, thereby avoiding income tax. The loophole in the tax system (a feature, rather than a bug) led investment industry icon Warren Buffet to highlight the absurdity of him being taxed at a lower rate of tax than his secretary.

The tax will not affect UK tax-domiciled investors directly, but will particularly impact the US private equity sector, and could have some impact on ordinary US stockholders of the major listed companies. Even so, the effect on the desire to hold stocks will be marginal for the vast majority of US citizens who are either below the $1 million income threshold or hold shares through their investments via the pension tax wrapper (401K) system. Historical observations from previous capital gains tax (CGT) rises show that stock markets have usually risen following an increase, but  traded more sideways than up in the run-up, as investors crystalised gains under the lower tax rate and then reinvested.

For UK investors, much more important will be whether our own government takes the opportunity to follow suit – which given the noises ahead of the last Budget seems relatively likely. More decisive for US stock prices, however, will be the efforts to increase the tax take from companies directly. One might think that the Biden Administration is using CGT as a means of keeping up the pressure to get the corporate tax rise through.
As a result, we continue to be somewhat wary of the largest stocks that would be most greatly affected by the increase in effective tax rates, given they have been most effective in utilising the existing loopholes.

So, should one head for smaller companies? Smaller stocks have performed very well over the past 12 months. Companies that have fared particularly well are those which currently have relatively little profit but are expected to be grow strongly over the coming two years. In other words, growth stocks. This is not only true for the US, as investment bank JP Morgan recently wrote about the outperformance of small and mid-cap growth companies globally, pointing out that the difference in valuation levels (P/E ratios) between growth and value stocks has reached levels similar to those of the heady days of the dotcom era at the beginning of the century.

JP Morgan ends up being outright bearish about these growth stocks, because it believes their inherent earnings growth expectations have become too stretched, especially as a lot of earnings growth is already forthcoming, a view we broadly share.

However, we think that the level of real interest rates (i.e., nominal interest minus the rate of inflation as priced by the inflation-linked government bond markets) relative to ongoing earnings are probably more important. That ratio has remained fairly stable over the past few years of strong stock market gains but declines in real yields. We will explore that dynamic in more depth in the next few weeks.

Turning back to the here and now, we wrote last week about how companies built up their defensive financial liquidity buffers at the start of the pandemic, and how that has fed through to lower than expected demand for bank loans now. The results of US banks confirmed that, and now the European Central Bank’s quarterly Loan Officer Survey (released this week) points to much the same thing. French and Spanish banks are seeing slow demand for funds from companies, though Germany is faring slightly better (the American version from the US Federal Reserve (Fed) will be published on 3 May).

Bank loans tend to be the source of funding for smaller companies, while large companies access loan funding more cheaply through capital markets directly, which points us towards recent bond issuance data. Relatively, in both the US and Europe, Bloomberg’s data on new bond issuance shows a much stronger level of demand for funds than is seen via loans, especially in the sub-investment grade area.

The chart below shows this year’s pace of US issuance in comparison to the previous four years:




Looking at the US specifically, where loan data is more readily available, the sum of bank loan and bond amounts outstanding has started to rise since the start of the year, with bond issuance exceeding another round of bank loan pay-downs, thus resulting in a net increase of overall loan finance.

That’s good news for the US economy. It shows that firms are probably confident, actively looking for finance despite having quite high levels of liquidity and markets receptive enough to their demands that they can afford to side-step the banks. Capital expenditure indications are very strong, which indicates firms are spending some of their excess liquidity (as long as they can get the equipment, given the shortage of semiconductor chips).

Meanwhile, the tightening in the labour market is leading to greater consumer confidence, and that is creating a house price and house-building boom (we cover aspects of this in our second article this week). Ongoing demand for mortgages is stronger than one might have expected given the recent rise in the long-dated fixed income yields.

Eventually, rising total private sector credit demand will become an upward force on yields again, and the spurt of bond issues in March – together with continued mortgage demand – appears to have been behind last month’s sharp rise in yields, and the resultant downswing in US treasury bond prices.

When do central banks start to get worried about private sector credit demand fuelling an overheating of the economy? Right now, we are still only at the start of a demand upswing, so we do not expect policymakers will begin feel the heat for many months yet, but it will be worth us watching events closely.
 

News Archive

30 July 2021

New article from Tatton Investment Management: Summer lull as markets go through the motions

23 July 2021

New article from Tatton Investment Management: Markets wake up to living with the virus

16 July 2021

New article from Tatton Investment Management: Earnings vs Delta

12 July 2021

New article from Tatton Investment Management: Don't look down

2 July 2021

New article from Tatton Investment Management:Transition uncertainties

25 June 2021

New article from Tatton Investment Management: Moderating expectations

18 June 2021

New article from Tatton Investment Management: Investors try to make sense of the Feds 'dot-plot'

11 June 2021

New article from Tatton Investment Management: Hazy as Carbis Bay

4 June 2021

New article from Tatton Investment Management: Going up sideways

28 May 2021

New article from Tatton Investment Management: Touch of Goldilocks at the end of May

21 May 2021

New article from Tatton Investment Management: Market resilience in face of Bitcoin crash

14 May 2021

New article from Tatton Investment Management: Market vertigo galore

10 May 2021

New article from Tatton Investment Management: Sell in May and go away?

30 April 2021

New article from Tatton Investment Management: Doubling of earnings leaves markets cold

23 April 2021

New article from Tatton Investment Management: 'Risk on' pauses while the real world keeps accelerat

19 April 2021

New article from Tatton Investment Management: New bond news gives green light for equity investors

9 April 2021

New article from Tatton Investment Management: Bond markets signal economic optimism

1 April 2021

New article from Tatton Investment Management: The first quarter of 2021 was no April fool

26 March 2021

New article from Tatton Investment Management: The world is moving on from the pandemic

19 March 2021

New article from Tatton Investment Management: Tug of war - bonds vs. equities

12 March 2021

New article from Tatton Investment Management: Recalibrations

5 March 2021

New article from Tatton Investment Management: Stock markets find they cannot have it both ways

26 February 2021

New article from Tatton Investment Management: Earnings look set to stabilise wobbling markets

19 February 2021

New article from Tatton Investment Management: One year on - who would have thought

12 February 2021

New article from Tatton Investment Management: No UK double dip, but much talk of bubbles

5 February 2021

New article from Tatton Investment Management: Calming of nerves

1 February 2021

New article from Tatton Investment Management: A fraying of nerves

25 January 2021

New article from Tatton Investment Management: A sigh of relief

15 January 2021

New article from Tatton Investment Management: Fiscal turbo replaces lame duck Trump

8 January 2021

New article from Tatton Investment Management: End points and new beginnings

18 December 2020

New article from Tatton Investment Management: Goodbye to all that

14 December 2020

New article from Tatton Investment Management: Outlook 2021 - no deal Brexit?

4 December 2020

New article from Tatton Investment Management: December concerns over baubles and bubbles

27 November 2020

New article from Tatton Investment Management: Fiscal floundering

20 November 2020

New article from Tatton Investment Management: More tunnel before the light

18 November 2020

Interim Results For The Six Month Period Ended 30 September 2020

13 November 2020

New article from Tatton Investment Management: Change is in the air

6 November 2020

New article from Tatton Investment Management: Looking beyond the obvious

4 November 2020

New article from Tatton Investment Management: US Election Update

2 November 2020

New video from Tatton Investment Management: US election, the response to the pandemic and Brexit

30 October 2020

New article from Tatton Investment Management: Unsettled week ahead - or behind

26 October 2020

New article from Tatton Investment Management: Sunlit uplands or COVID gorge?

19 October 2020

New article from Tatton Investment Management: Watching and waiting

12 October 2020

New article from Tatton Investment Management: Baffling market optimism

2 October 2020

New article from Tatton Investment Management: A question of time horizons

25 September 2020

New article from Tatton Investment Management: A recovery on hold

18 September 2020

New article from Tatton Investment Management: Taking a step back to look forward

14 September 2020

New article from Tatton Investment Management: Frictions and contradictions

7 September 2020

New article from Tatton Investment Management: Market dynamic of a K-shaped recovery

1 September 2020

New article from Tatton Investment Management: Big tech gets bigger while the Fed takes the easy opt

24 August 2020

New article from Tatton Investment Management: Fed leaves bond investors with that sinking feeling

17 August 2020

New article from Tatton Investment Management: COVID II the sequel - as scary as the original?

10 August 2020

New article from Tatton Investment Management: July brings consolidation

2 August 2020

New article from Tatton Investment Management: Sunshine and shadows

27 July 2020

New article from Tatton Investment Management: PPE = Politics, Pressure and Economics

20 July 2020

New article from Tatton Investment Management: Discomfort of disappearing safety nets

13 July 2020

New article from Tatton Investment Management: Fast and freewheeling

3 July 2020

New article from Tatton Investment Management: H1 2020 offers meaningful lessons

29 June 2020

New article from Tatton Investment Management: Support balances increasing strains - for how long?

22 June 2020

New article from Tatton Investment Management: Equity valuations follow bond valuations' lead

15 June 2020

New article from Tatton Investment Management: Stock markets suffer altitude sickness

8 June 2020

New article from Tatton Investment Management: Markets are enjoying an uncomfortably benign pandemic

1 June 2020

New article from Tatton Investment Management: Optimistic markets despite second wave lockdown threa

26 May 2020

New article from Tatton Investment Management: Just as the sun comes out, clouds appear in the East

22 May 2020

New video from Tatton Investment Management

18 May 2020

New article from Tatton Investment Management: Us-China cold war: Threat or blessing?

11 May 2020

New article from Tatton Investment Management: Most welcome, if feeble, signs of pulling together

4 May 2020

New article from Tatton Investment Management: Opening-up will be slower than locking down

27 April 2020

New article from Tatton Investment Management: V or U-shaped recovery scenarios - the jury is out

20 April 2020

New article from Tatton Investment Management: Lifting lockdown remains a delicate balancing act

20 April 2020

New video from Tatton Investment Management: Stock markets between hope and despair

15 April 2020

New video from Tatton Investment Management: Is now the time to invest?

13 April 2020

New article from Tatton Investment Management: Fading threat of financial crisis re-opens old divide

6 April 2020

New article from Tatton Investment Management: Unprecedented quarter or calm before the storm?

30 March 2020

New article from Tatton Investment Management: Extraordinary: bear and bull market all in one

24 March 2020

New video from Tatton Investment Management: Why have stock markets appeared to rally on the lock-do

23 March 2020

New article from Tatton Investment Management: Government ordered recession

19 March 2020

New video from Tatton Investment Management: Confusion reigns in Capital Markets

18 March 2020

New article from Tatton Investment Management: Why aren't you doing something?

17 March 2020

New video from Tatton Investment Management: From euphoric recovery to depressed tumble

16 March 2020

New article from Tatton Investment Management: Notes on a crash: the short, the medium and long term

13 March 2020

New video from Tatton Investment Management: Panic equity selling or panic raising of precautionar

12 March 2020

New article from Tatton Investment Management: Forced sellers and other distractions

9 March 2020

New article from Tatton Investment Management: Dark times or glimpse of light at the end of the tunn

6 March 2020

New article from Tatton Investment Management: News of a reverse oil price shock rattles markets bey

2 March 2020

New article from Tatton Investment Management: Coronavirus - hitting too close to home

28 February 2020

New article from Tatton Investment Management: This week's market correction requires perspective

26 February 2020

New article from Tatton Investment Management: COVID-19 and the reaction of markets to pandemic fear

24 February 2020

New article from Tatton Investment Management: US markets hit new all-time highs and a 'bump'

17 February 2020

New article from Tatton Investment Management: V-shaped recovery for Valentine

10 February 2020

New article from Tatton Investment Management: Markets show no fear - should they?

3 February 2020

New article from Tatton Investment Management: Looking through the noise of the week

27 January 2020

New article from Tatton Investment Management: Short break to Goldilocks?

20 January 2020

New article from Tatton Investment Management: Parallels and differences to January 2018

14 January 2020

Appointment of Joint Broker

13 January 2020

New article from Tatton Investment Management: So far so good

8 January 2020

Tatton: Woodford & M&G suspensions have driven IFAs to us

6 January 2020

New article from Tatton Investment Management: 2020 starts with a Trump card

23 December 2019

New article from Tatton Investment Management: Goodbye 2019 - welcome 2020 and a new decade!

16 December 2019

New article from Tatton Investment Management: Brightening horizons - 2020 Outlook

8 December 2019

New article from Tatton Investment Management: Can Trump derail the 2020 economic upturn?

2 December 2019

New article from Tatton Investment Management: Markets are driving the markets

25 November 2019

New article from Tatton Investment Management: Markets pause for reality check

18 November 2019

New article from Tatton Investment Management: Swilling cash eases the market mood music

11 November 2019

New article from Tatton Investment Management: Recession concerns retreat

11 November 2019

Interim Results for the six months ended 30 September 2019

4 November 2019

New article from Tatton Investment Management: Crucial October period safely behind

28 October 2019

New article from Tatton Investment Management: Slowly turning

21 October 2019

New article from Tatton Investment Management: Brexit breakthrough versus Brexit fatigue

17 October 2019

Trading Statement

17 October 2019

Acquisition of Sinfonia Asset Management Limited (SAM)

14 October 2019

New article from Tatton Investment Management: Market sentiment rebound

7 October 2019

New article from Tatton Investment Management: Stall speed economy fears spreading

30 September 2019

New article from Tatton Investment Management: Ominous US-Dollar strength

23 September 2019

New article from Tatton Investment Management: Diverging economic trends - catalyst for trade war re

16 September 2019

New article from Tatton Investment Management: Market sentiment rebound

9 September 2019

New article from Tatton Investment Management: Choppy water but no storm, yet...

2 September 2019

New article from Tatton Investment Management: Fattening 'tails'

27 August 2019

New article from Tatton Investment Management: Populism politics reversing austerity?

19 August 2019

New article from Tatton Investment Management: Market spat between bond and equity markets

11 August 2019

New article from Tatton Investment Management: Bond markets unnerve equity markets - again

5 August 2019

New article from Tatton Investment Management: The Elephant and the Little Old Lady

29 July 2019

New article from Tatton Investment Management: The quick and the not-so-quick

22 July 2019

New article from Tatton Investment Management: ...'Twere well it were done quickly

15 July 2019

New article from Tatton Investment Management: Positioning for a summer of wait and see

8 July 2019

New article from Tatton Investment Management: Liquidity drives stock markets to new highs

1 July 2019

New article from Tatton Investment Management: The middle of the year - a tipping point?

24 June 2019

New article from Tatton Investment Management: Battle of the ‘doves’

17 June 2019

New article from Tatton Investment Management: Mixed messages

10 June 2019

New article from Tatton Investment Management: The return of the central bank put?

3 June 2019

Appointment by Tenet Group

3 June 2019

Appointment by Frenkel Topping

3 June 2019

Preliminary Results For the year ended 31 March 2019

3 June 2019

New article from Tatton Investment Management: Bond rally musings

27 May 2019

New article from Tatton Investment Management: It is getting warmer

20 May 2019

New article from Tatton Investment Management: Market support for Trump or unwarranted equanimity?

13 May 2019

New article from Tatton Investment Management: Geopolitics re-enter market stage

7 May 2019

New article from Tatton Investment Management: Central banks disappoint expectations

29 April 2019

New article from Tatton Investment Management: Waning market stimuli put stock markets on notice

23 April 2019

New article from Tatton Investment Management: Spring time from here?

16 April 2019

Trading Statement for 12 months ending 31 March 2019

15 April 2019

New article from Tatton Investment Management: Brexit in-limbo aside sentiment is improving

8 April 2019

New article from Tatton Investment Management: Happy 10th birthday, choppy bull market

1 April 2019

New article from Tatton Investment Management:29 March 2019 – quarter end

25 March 2019

New article from Tatton Investment Management: Brinkmanship and extensions

18 March 2019

New article from Tatton Investment Management: Bits & Pieces

11 March 2019

New article from Tatton Investment Management: ECB stimulus U-turn leaves markets unimpressed

4 March 2019

New article from Tatton Investment Management: £-Sterling ‘applauds’ prospect of Brexit delay

25 February 2019

New article from Tatton Investment Management: Progress?

18 February 2019

New article from Tatton Investment Management: Investment perspectives for different Brexit outcomes

15 November 2018

Interim Results for the six months ended 30 September 2018

15 October 2018

New article from Tatton Investment Management: Autopsy of a stock market sell-off

1 October 2018

New article from Tatton Investment Management: Poor politics containing bond market risks?

27 September 2018

New article from Tatton Investment Management: Brexit clamour vs. real market new

7 September 2018

New article from Tatton Investment Management: Interesting times ahead

31 August 2018

New article from Tatton Investment Management: “Not the end of the world”

24 August 2018

New article from Tatton Investment Management: Steady markets vs. noisy politics

17 August 2018

New article from Tatton Investment Management: Political strongman tactics come home to roost

10 August 2018

New article from Tatton Investment Management: Summer heat wave makes way for return of political he

3 August 2018

New article from Tatton Investment Management: A gentle deceleration?

27 July 2018

New article from Tatton Investment Management: Hot air for a hot summer?

20 July 2018

New article from Tatton Investment Management:Earnings are growing, why worry?

13 July 2018

New article from Tatton Investment Management: Hard Brexit demonstration potential?

6 July 2018

Notice of Annual General Meeting

6 July 2018

New article from Tatton Investment Management: It is getting hot

29 June 2018

New article from Tatton Investment Management: Digesting or consolidating?

27 June 2018

Preliminary Results for the year ended 31 March 2018

22 June 2018

New article from Tatton Investment Management: Fragile recovery

15 June 2018

New article from Tatton Investment Management: No surprises

8 June 2018

New article from Tatton Investment Management: Delicate equilibrium

1 June 2018

New article from Tatton Investment Management: Ignore politics at your peril

25 May 2018

New article from Tatton Investment Management: GDPR? No - far more interesting news!

18 May 2018

New article from Tatton Investment Management: What's the economic reality of this week's news?

11 May 2018

New article from Tatton Investment Management: Batten-down-the-hatches?

4 May 2018

New article from Tatton Investment Management: Past the peak?

27 April 2018

New article from Tatton Investment Management: Confusing signals?

20 April 2018

New article from Tatton Investment Management: A mixture of messages

6 April 2018

New article from Tatton Investment Management: Could do better

6 April 2018

New article from Tatton Investment Management: Peaking, plateauing or dimming – and how about that

29 March 2018

New article from Tatton Investment Management: End of a stormy quarter

23 March 2018

New article from Tatton Investment Management: Now we know it's risky!

16 March 2018

New article from Tatton Investment Management: Back to Normal?

9 March 2018

New article from Tatton Investment Management: Tariffs to growth

2 March 2018

New article from Tatton Investment Management: Time to take some profits

23 February 2018

New article from Tatton Investment Management: Change of direction or gradual normalisation?

16 February 2018

New article from Tatton Investment Management: Breathing easier for the moment

9 February 2018

New article from Tatton Investment Management: Meteoric stock markets crash bac

6 February 2018

Tatton Investment Management's Stock Market Correction Assessment

2 February 2018

New article from Tatton Investment Management: Good news turns bad news - again!

26 January 2018

New article from Tatton Investment Management: Surprises

19 January 2018

New article from Tatton Investment Management: US$ weakness versus Bitcoin and Carillion

12 January 2018

New article from Tatton Investment Management: Bullish sentiment rings alarm bells

5 January 2018

New article from Tatton Investment Management: Encouraging kick-off

15 December 2017

New article from Tatton Investment Management: 2017 - taking stock

8 December 2017

New article from Tatton Investment Management: Progress versus Bitcoin

5 December 2017

Interim results for the six months ended 30 September 2017

1 December 2017

New article from Tatton Investment Management: Sudden, but not entirely unexpected

24 November 2017

New article from Tatton Investment Management: Invincible markets?

17 November 2017

New article from Tatton Investment Management: Yield-curve flattening: a bad omen?

10 November 2017

New article from Tatton Investment Management: Nervous investors herald more volatile markets

3 November 2017

New article from Tatton Investment Management: UK rate rise: ‘one and done’ or beginning of rate

27 October 2017

New article from Tatton Investment Management: Trick or treat season

13 October 2017

New article from Tatton Investment Management: All-time highs and Q3 results outlook: Reasons to be

6 October 2017

New article from Tatton Investment Management: Bad news – good news

29 September 2017

New article from Tatton Investment Management: Movements

22 September 2017

New article from Tatton Investment Management: QT to reverse QE and 2-year transition period to soft

15 September 2017

New article from Tatton Investment Management: BoE guides for year-end rate hike - Bluff or real?

8 September 2017

New article from Tatton Investment Management: ‘Back to school’ amidst hurricanes, earthquakes

1 September 2017

New article from Tatton Investment Management: Bad news, Good news

25 August 2017

New article from Tatton Investment Management: Summer low or summer lull?

18 August 2017

New article from Tatton Investment Management: More sellers than buyers

11 August 2017

New article from Tatton Investment Management: Stocks take note of North Korea crisis - or do they?

4 August 2017

New article from Tatton Investment Management: Consolidated base but momentum dwindling

28 July 2017

New article from Tatton Investment Management: Summer thoughts about the ‘longer term’

21 July 2017

New article from Tatton Investment Management: Summer lull - delayed

14 July 2017

New article from Tatton Investment Management: Pre summer-holiday investment check

7 July 2017

New article from Tatton Investment Management: Global growth ploughs on while markets take a breathe

23 June 2017

New article from Tatton Investment Management: Quo Vadis Britain?