The headlines this morning are full of yesterday’s rioting in the US. It’s not comforting to see the seat of democracy in the world’s most powerful country being stormed by people who aren’t willing to accept the result of an election.
People whine about democracy a lot these days. And it’s not perfect. But its core feature is that it enables the peaceful handover of power. If you don’t think that’s a “killer app”, then I suggest you look at what happens in countries that lack democracy when the leadership changes.
Anyway, our role here is to discuss markets, and to put it bluntly, markets couldn’t care less. There’s a good reason for that. Oddly enough, it comes down to the election results.
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Blue wave, blue rinse – whatever you want to call it, the Democrats are in charge
The recent US presidential election ended up being much closer than many had expected. The Democrats won, but they didn’t get the “blue wave” that everyone was talking about. As a result, it looked as though the US government was going to be gridlocked.
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When that happened, markets were pretty comfortable with it. That’s partly because they’re in an “all news is good news” kind of mood anyway, but it’s also because it meant no tax rises from the “hard left” Democrats, and it also meant that you’d still get at least some government spending, because the election was over and there’d be no real political gain to stalling on any more coronavirus packages.
However, then the run-off elections in Georgia happened. As it turned out, the Democrats won both of these elections. To avoid getting into the details of local politics in another country, which bore me as much as they should bore you, the reason this matters is that it now means the Democrats have control of the Senate. Now, they’ve only just got control. So if there’s even one rebel Democrat – and there will be plenty of those, as both parties are riven with internal splits right now – they can throw a spanner in the works.
But one thing that seems very likely is that it means we’ve gone from the prospect of “quite a big stimulus” to a “very big stimulus” with a side order of “an ongoing bias towards spending more generally”. Markets are lapping that up. And they’re also starting to believe that it really does mean that the reflation story is a narrative that they can put their faith in. Already the yield on the benchmark US Treasury bond (the ten-year) has risen above 1%.
Once upon a time (actually, just a year or so ago), the idea of lending money to the US at 1% a year for a decade would have been astonishing. Now it’s viewed as a sign that investors are becoming more optimistic on prospects for growth and inflation. It shows you how far we’ve come in such a short period of time.
But in any case, the Georgia result reinforces the “reflation” story. And at the moment, that’s all markets need to hear.
Investors won’t want to wait for jam tomorrow anymore
So what does it mean for your money? We’ve discussed this a lot before, both here and in MoneyWeek magazine (with more specific tips there, of course). At a big picture level, it means a move from "long duration" assets (ones which benefit from low interest rates) to "short duration" ones (ones which do better with higher rates). You can read a more detailed explanation of what all that means here.
But if you’re looking for a simple shorthand way to sum up the investment implications of this shift as far as equities go, then I’d say it’s time to be short (ie, selling) the Nasdaq and long (ie, buying) the FTSE 100. To be clear, I don’t recommend shorting unless you already know what you’re doing. There are lots of things that can go wrong even if you’re right directionally. But there are worse ways to keep an eye on whether or not the shift from "long duration" assets to "short duration" ones is actually panning out or not.
The Nasdaq is tech-heavy. The biggest companies in the index have been among the key beneficiaries of our low interest rate, intangible asset, “it’s all about building networks today and making profits tomorrow” world. Apple, Amazon, Tesla, Facebook – you know the ones. The Nasdaq holds companies who mostly make things that you can’t touch – or whose value resides mostly in the bits you can’t touch (ie, the iPhone matters a lot, but so does the app store. Tesla cars matter, but the wild valuation lies in the hope that one day they’ll have self-driving software updates and so on).
The FTSE 100 is resolutely old school. The biggest companies in the index make a lot of money by doing boring things. There is very little about them that is “blue sky”. They get oil out of the ground; they provide bank accounts and loans; they sell pills, drinks, and cigarettes (separate companies, obviously). In short, the FTSE 100 holds companies who mostly make their money from things that you can touch.
The Nasdaq of course, is also US-centric. The US has been by far and away the best place to be invested for a long time now. That’s showing signs of changing, with other countries playing catch-up. And few are in a better place to play catch up than the UK. It’s one of the cheapest developed markets in the world and it’s coming from a position where it’s been widely detested.
As money runs around looking for “catch-up” plays towards the end of a frantic bull market, the UK looks well-placed as a market for desperate fund managers’ eyes to light on. Particularly as the biggest bits of Brexit are now in the rearview mirror.
We’ve more on this in the latest issue, out tomorrow. Get your first six issues free here.
