By Rebecca Ellis
WED, OCTOBER 02 2019-theG&BJournal- We all know the famous line “sell in May” but few remember the end of the jingle. As the Summer ends, what have we returned to? Much of the same as before the break-in political terms. Despite some short-term hectic, the past quarter has been a quiet one in terms of performance: The S&P500 managed a modest gain of barely 0.7% and the European indexes are flat.
In the US, some of the smaller companies have been volatile lately. Recent ‘hot’ stocks such as Software as a Service (SaaS) and other recent IPO companies have taken a hit. Don’t be alarmed: This was a sector-wide problem, and the decline doesn’t seem to have any catalyst or news driving it. For each company we follow, the business has not changed, revenue is still growing rapidly, and the number of new customers is growing. Only the stock prices are moving down. Price volatility occurs for stocks trading at high valuations, especially before they enter the realm of profitability.
A possible reason for the decline is worry that a continued trade war with China could weaken global economies, leading to another recession. New tariffs could negatively affect many U.S. technology companies, dragging stocks down with them as the Nasdaq index falls. This could all change, of course, if China and the United States reach a trade agreement. Given time, this could also change if these companies continue to report rapidly growing sales, or if they significantly improved negative operating margins. At this point, these companies don’t have to be profitable; they just need to improve their operating margins.
On the other side of the Atlantic, equities have underperformed the US by 20 percentage points in dollar terms since May, creating an entry point for investors. Institutional investors have turned particularly sour, with US-domiciled funds having aggressively cut their exposure to Europe. Eurozone equities are trading well below their historic relative valuations compared with the US.
The European economy is teetering on the brink of recession, as a sharp downturn in the region’s manufacturing sector has begun to bleed into the wider economy. The European Central Bank warned that the region’s latest monetary stimulus may have to last a long time if national governments do not start spending more to counter the global slowdown. The prospect of an increase in fiscal stimulus could be enough to support markets but is unlikely anytime soon. The prospect alone is enough to boost markets. Bond markets are pricing a lower political risk for Italy and Greece, for example. So far equity markets have not followed up.
The calm Summer is over, and we are looking at a stormy Fall just like the weather outside our windows. The wind could blow in our faces depending on which way politics tilt the scales. It could also blow in our back and propel valuations further upwards. It is quite possible that some of the biggest stress factors dissolve in thin air. While Brexit may not be resolved before the end of the year, there is a high probability that the trade dispute between the USA and China could be resolved as Mr. Trump is hitting the election trail.
Rebecca Ellis is a Personal investment advisor, based in Zurichemail@example.comfirstname.lastname@example.org.