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

24 February 2020

Bubble Trouble

Compared to last week, there have been few changes to the big picture narrative: Thanks to the virus containment efforts enacted by its government, China’s labour force is only now slowly returning to work following an unusually extended Lunar New Year break. But most importantly, factories have restarted, even if at lower output levels than their trading partners would have banked on at the beginning of the calendar year. Because of the global supply chain interdependencies, and the temporary fall in Chinese demand, the resulting slowdown in industrial activity around the world is increasingly seen as a delay to the expected 2020 economic recovery. The upswing is unlikely to come in the first quarter, perhaps not even in the second, but after that activity levels are likely to jump up in the second half of the year.

In the UK, the new government’s actions confirmed our view that austerity is not part of their vocabulary and that we can expect a significant boost in public investment. While much of this is expected to be debt financed, the March Budget may nevertheless bring direct and indirect tax increases, or the government risks losing trust and support from capital markets – which could ruin their fiscal expansion plans. For the moment, fiscal expansion is good news, as it will reduce dependence on export demand. However, alongside Home Office plans to curb “lower skilled” immigration, the fiscal expansion plans have the potential to create wage-driven inflation pressures. That is, unless the government can also coerce businesses into significantly hiking their investment levels to increase productivity, which have been severely lacking recently. Businesses’ workers may well be attracted onto better pay in the government’s infrastructure projects.

We discussed last week how markets appear willing to disregard the unavoidable deterioration of earnings prospects in manufacturing over the first two quarters in return for an enhanced outlook for the second half of 2020. This week continued along the same lines, with the US stock markets once again hitting new all-time highs. But this was not the whole story. So, we devote the rest of this piece to discussing the nature and dynamics of stock market bubbles.

Blowing Bubbles

On Thursday evening, there was a sudden rush to the exit in some of the highest valued stocks in the world. Those who have described current US valuations as being in bubble territory saw this as a vindication of their view. There was no obvious trigger for the sell-off. News wires might point to the rise in South Korean COVID-19 infection cases – but this sounds a bit far-fetched, given the spread is well within expectations from last week.

Current market conditions continue to be mostly about liquidity and investor capital flows – with near-term economic prospects looking sluggish. When market movements are dominated by liquidity flows, it tends to be related to asset bubbles. Bubbles are risky for investors because they eventually deflate, even if it may not feel that way when we are in the middle of one – most investors prefer to be part of a bubble when its inflating. At the same time, investors would like their active managers to use “timing” to get out at the right moment.

Bubbles inflate when most are getting in, but during this phase, some market players try to lessen the risk by “scalping”: buying and then taking a quick, smallish profit. That has the effect of increasing trading volumes and lessening daily volatility. Prices squeeze upwards rather than gapping up. (There are also other reasons for low short-term volatility, related to options trading).

It does not work like that on the way down. Signs of more than expected intraday volatility, as seen on Thursday evening, can be a signal for the longer-term timers to exit. The number of buyers in this sort of market can fall quickly to virtually none.

Of course, short-term volatility is used by many as a primary measure of investment risk. So, the riskier phases in markets can seem like the least risky, which leads back to what we said above, that the riskiness of a bubble building is usually not immediately apparent during the process.

So, are the bears right that a stock market bubble is building, one that will inevitably end in another enduring market correction later in the year? We do not think so – although even we cannot be entirely sure. What we do know is that current market action is ignoring the fact that Chinese and international virus containment actions will lead to lower than anticipated growth rates during the first half of 2020. Should expectations for the virus impact prove correct, and COVID-19 follow similar patterns to flu pandemics of past decades, then a V-shaped recovery later in 2020 is a reasonable expectation. In which case, company earnings should underpin the levels stock market valuations have reached in anticipation of such an outcome.

The discomfort of this market environment is that any bouts of doubt about the benign scenario unfolding leads to potentially outsized market reactions. Such effects can be as short-lived as they were this week, but also slightly longer lasting, as experienced last year in May and August.

 

News Archive

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?