What the return of the old normal could mean for your money

Just before I get started this morning – on Thursday, David Stevenson and I will be talking to Charlotte Ransom of Netwealth along with Jane Lewis, City Editor of The Week, about the challenges facing investors in these turbulent times, and how to overcome them. Sign up here to view live or to have access to the recording to watch at your leisure.

Markets had a day of wild moves yesterday. And for once, it wasn’t to the downside. Oil soared by 10% at one point. Value stocks rocketed. Big Tech stocks wilted. Airlines saw gains of upwards of 20%. Office Reits jumped higher. Bond yields rose (so prices fell).

It’s all off the back of the news that we might just be able to rid ourselves of this virus sooner than we’d dared hope. As I noted in yesterday’s news story on the topic, Pfizer and Germany’s BioNTech SE announced very encouraging news on their Covid-19 vaccine. And it seems to be very effective.

Even if this vaccine doesn’t work, another one will

Now, lots of well-meaning (and not-so-well-meaning) people are falling over themselves to downplay the news, and warn us about all the hoops that have to be jumped through first.

That’s fine. We’re adults. We know. We’re not going to strip our masks off and run about Tesco's embracing random strangers and squeezing the fruit and veg with abandon. We’ll be discussing the details of the vaccine and the likely timeline in the next issue of MoneyWeek magazine, out on Friday (subscribe now - you get your first six issues free).

The point is that we now have concrete evidence that a viable vaccine can indeed be put together in what was at one point viewed as an impossibly short timeframe. We now know that we probably don’t have to live with Covid-19. There are loads of other vaccines being tested. If this one doesn’t cut it, one of the others will. Most importantly, we now know that politicians will really struggle to justify any further lockdowns much beyond the end of the year, which clears away a massive cloud that was hanging over 2021.

What that means is the markets no longer have to discount a “stop-start” economy where we go in and out of lockdown like some macabre Hokey Cokey. And it was clear from yesterday’s turbulence that markets were pricing in a great deal of ongoing disruption.

You can pick out a lot of individual fun details (the Zoom share price falling by more than 15% was highlighted by many with an almost unseemly level of schadenfreude). But the main themes are quite telling.

Interest rates rose. In other words, bond yields went up and bond prices went down. Why? Two reasons. Firstly, no one wants to own boring old bonds if the economy is going to improve. They want to own risky stuff. Secondly, if the economy speeds up, the Federal Reserve (and other central banks) might have to raise interest rates faster than previously expected. I take issue with the second of these – but it’s certainly a valid rationale.

Why did precious metals fall?

Meanwhile, value stocks surged while the FANGs (or whatever the current acronym is) actually fell. Why’s that? It’s partly linked to the interest rate argument. The tech stocks are “long duration” assets – they do well while interest rates are low and growth is weak. So they fell for the same reason bonds fell.

As for value - it’s the flip side of growth and tech. What’s bad for those stocks is often good for value. Value includes dull industries that generate lots of cash flow today but are assumed to be destined to see weak or non-existent growth for tomorrow (which is not always correct, of course). So many value stocks could be described as “short duration”. But also, the value bucket contains all those stocks that were languishing because of Covid lockdowns. Suddenly we might be able to fly again one day. Suddenly we might be able to go on holiday. Suddenly we might eat out. Suddenly we might go back to the office occasionally. All those sorts of stocks did well – and the oil price surge rather epitomises that.

The one thing that might confuse some readers is that precious metals took a hit yesterday, though they’re showing signs of stabilising today. Why? As Louis Gave of research group Gavekal points out, “rising yields are a serious headwind for the gold price”. However, as Gave continues, what really matters for gold is “real yields”. In other words, as long as inflation is rising faster than interest rates, then in the longer run, the precious metals should have further to go.

This is where my earlier point comes in. It makes sense that interest rates rose yesterday, but I can’t see central banks allowing them to creep higher to the point where they pose any sort of risk to the economy. And to be clear, they don’t have to go very high to get to that point, such is the extent of our debt pile. Central banks (and governments) want inflation to get rid of the debt. That means they have to be relaxed about inflation rising and they also have to do what they can to keep interest rates nailed to the floor.

So I don’t think the precious metal bull is over. Just be aware that it’ll be a bumpy ride until it becomes apparent that inflation is definitely the goal and that it’s achievable.

Again, if you haven’t seen it, you should watch Merryn’s interview from last week with Jim Mellon now. A number of the companies mentioned in the video have already rocketed following the vaccine news, but it’s worth noting that Jim didn’t just see them as vaccine recovery plays – and in any case, he also has some ideas that should come to fruition over the much longer term. Watch it here.