The week to Tuesday’s close saw a slight change in the tone of markets with mid and smaller companies outpacing technology and gold. The UK stock market rose by 2.3%, the US by 0.8% and Europe by 2.1%. Gains were unevenly distributed with UK smaller companies gaining 4.6% and US mid caps 2.7%. In sharp contrast, the leaders of the past few months gave up gains, US technology stocks falling 1.4% and gold 6.0%. Fixed interest also gave up ground, the 4.25% UK Treasury 2040 falling 1.6%.
We have spoken before about how low interest rates have boosted the price of fixed interest, gold and technology stocks in particular. And about how the beneficiaries of a trend for rates to rise would be different. This week’s performances are largely in line with what we expect to see as investors rotate out of the winners of the low interest rate environment into securities that will benefit from the return of normality. And of a rise in the cost of money.
The underlying argument coming into play is very simple. Despite media worry stories of a second wave, the return of lockdowns and quarantines there will be no more national lockdowns on the scale seen this year. Governments will continue to ‘press the pedal to the metal’ to accelerate the recovery and will err on too much stimulus rather than too little. With the eventual approval of a vaccine now closer the risk is rising that the pressures that propelled fixed interest and technology to record highs will moderate and, eventually, reverse.
It would be folly to take one weeks’ performance as conclusive evidence that this is the turning point. But outperforming markets is largely about anticipating what other investors will do next, or at least soon. And moving in steps as turning points inevitably get closer is a sensible tactic, one that helps capture more of the available gains and avoid more of the potential losses than any alternative.
While in the short term it can be painful explaining why others are ‘doing better’, in the long term it is seldom wrong to be early.