After a minor tantrum, the market liked the growth orientation of the Budget and sent stocks into the next orbit. February was a great month for the broader markets with widely acknowledged high quality stocks taking a breather. Just reiterates the message that no single approach is evergreen, investors need to calibrate without going down the quality curve.
Some narratives that dominate the market headlines today
Higher commodity prices – It has been a very strong rally over the past few months, initially driven by supply shortages and now by expectations of higher demand. Prices always manage to find newer reasons to go higher when the trend works, there have been predictions of an upcoming commodity super cycle. Let us wait and watch before jumping to conclusions, when Trump came to power in 2016, commodities spiked for a good 6 months before reversing
Rising Bond Yields – This has been one of my bigger worries over the past 2 years, but Central Banks can step in and do more to keep yields in check. Bank of Japan has been able to keep yields low for decades and thus make the large Govt debt manageable for Japan. Whether the developed world can replicate this or not, time will tell. Very few non professional investors understand how bond yields impact prices across asset classes. Instead of giving risk free return, developed market bonds have become instruments of risk at low return over the past few years. Yield curve control might be the policy buzzword of CY2021.
Equity market crashes over the past decade or so have been triggered by gyrations in other asset classes. 2008 was a credit crisis in the US mortgage market, 2011 was a sovereign bond crisis in the Euro periphery, 2020 was a health crisis that resulted in a world wide economic lockdown. Predicting equity market booms and crashes ain’t easy, which is why very few manage to get it right. Good investors manage to do enough things right to minimize the impact of these cycles.
What we can do as investors is to stick to the allocation plan and ensure we stay within limits. Rebalance every now and then, especially when stock price movements become very steep. You may not be able to avoid corrections but you can always minimize the possible impact of one by ensuring you don’t have more at stake than you are comfortable with.
The nature of bottom up stock picking does not change based on market conditions. We stick to the process that works well and ask ourselves if the current prices are justified for what the particular business can deliver. When most stocks appear to be expensive this way, we either wait for earnings to catch up or for prices to revert to saner levels. This is simple to talk about but difficult to execute. This process always feel sub optimal in the short term but works out well over the medium term. This has more to do with judgement and experience rather than knowledge and IQ.
A period of stagnation in stock prices might be the healthiest thing to happen to the markets for a few months.