Something that really annoys me as a Financial Planner is reading headlines about billions being wiped off the value of the stock market. We so rarely hear about the opposite, on the days when billions are wiped on.
Today is one of those days, with the FTSE 100 index of leading UK company shares closing up 3.47% on the day, at 6,841.86 points.
I’ve said before in my videos that it’s not always easy to attribute reasons to stock market surges, or indeed declines. Today though, let’s have a go at looking for the reasons why the FTSE is up so strongly.
A lot of today’s growth seems to be driven by expectations of more fiscal stimulus in the US. All eyes right now are on the Georgia Senate race, where the Democrats are on track to take control. That’s President-Elect Joe Bidens’ party, by the way, and control of the Senate would give Biden a great deal more power to push through his legislative agenda.
It’s a re-run of the election in Georgia, because of a state rule saying that one candidate must secure at least 50% of the vote to win. 98% of the votes have been counted, and US TV networks and the Associated Press have called the win for the first of two elections there, for a Democrat candidate. The other race for the Senate seat appears to be slightly tighter, but we’ll hopefully find out later today.
Why this interest in slightly obscure US politics all of a sudden? Well, if the Democrats control the Senate and new US President Joe Biden can push through his agenda, then that’s likely to mean more expansionary US fiscal policy, and also higher taxes in the States.
A note today from Deutsche Bank analysts said: “Our US economists have indicated that a Democrat Senate would likely lead to another large fiscal stimulus package, possibly including some priorities of the new Administration such as infrastructure. They see that as a material upside to their GDP forecast, which they currently see rising 4.3% Q4/Q4 in 2021.”
But is Democrat control of the Senate for the start of Biden’s presidency, and the prospect of more fiscal stimulus in the States, really enough to push up the FTSE 100 this much?
It’s certainly good news for financials, which make up a sizeable portion of the index. And also for the industrials sector. In my recent video about the poor performance of the FTSE 100 in 2020, I referenced the index being sometimes called a 20th-century index. It’s light on tech, and heavy on more traditional sectors, including banking, commodities and industrials.
What I think we might be witnessing today is a bit of a rebalancing away from the new school and back to the old school. Allow me to explain.
While the Democrats leading the Senate is likely very good news for financials and industrials, it’s probably going to create some short-term headwinds for tech companies. Looking back at 2020, it was the year of the tech company, with the tech-heavy S&P 500 doing incredibly well, and the tech underweight FTSE 100 doing poorly.
Tim Chubb, chief investment officer at GIRARD Advisory Services, said in Reuters today: “There will be beneficiaries of a Democratic sweep and there are companies in the Nasdaq – technology and healthcare – that could potentially face some short-term headwinds when it comes to higher taxes and more regulation, impacting their bottom lines.”
We’ve seen this fear of headwinds for tech today, with the Nasdaq slipping back 0.7%, as the likes of Apple, Microsoft, Amazon, Facebook and Alphabet (owners of Google) losing up to 2%. Of course, the S&P is heavily weighted towards these tech-giants, these FAANG stocks, too. Tesla, on the other hand, is doing pretty well today.
Rather than today being an especially good news day for the global economy, my contention here is that the good news we’ve seen has been well focused on the typical companies in the FTSE 100 index, and to some extent in other indices across Europe. There’s plenty of gloomy economic news around today as well, just to maintain some balance.
We’ve heard Boris Johnson today say that the national lockdown in England will be slowly unwrapped. He warned parliament that the third national lockdown will require “gradual unwrapping” over time, but he also pledged that schools would be the “very first things to reopen”, which I’m sure is very welcome news to any parents watching this.
Back across the pond in the US, we’ve seen rather negative payroll data, with private companies losing staff in December for the first time in eight months. The ADP National Employment Report today reported job losses across all sectors in December, and suggests the US economy is heading back into a recession in the near term, as Covid cases there surge again and more lockdown measures are introduced.
Today’s performance of the FTSE, with billions being wiped on, is a useful reminder for investors of two key things. Firstly, don’t put all of your eggs in one basket. Yes, tech stocks were fantastic last year, but you should not bank on one sector consistently driving market returns each and every year. Tech might be the future, but it should only form part of your overall portfolio. So many investors learnt that lesson the hard way during the tech bubble of twenty years ago.
Secondly, keep in mind that for every time you see the headline saying that billions have been wiped off the index, there are days like today when billions are wiped back on. The most successful investors do their level best to ignore the short-term noise surrounding the markets. And yes, I’m conscious that this video is potentially adding to that short-term noise, although I hope it contains some valuable lessons too.
Think about investing in terms of years or decades, not in terms of days, weeks or months. When you see sensationalist headlines about the markets, find something more interesting to watch on television. And when you hear journalists getting worked up about the FTSE 100, keep in mind, as I’ve said before, that it is an extremely poor proxy for either UK and global equity markets. Please don’t use it as your benchmark for equity portfolio performance.