This week: ASX v Wall Street
FYTD: ASX v Wall Street
There’s an old adage in Australian investing folklore that states: “investors should sell in May and go away”.
Unsurprisingly, the statistical basis for this is a little dubious. Not to mention the fact that it escapes any form of sensible deductive reasoning.
In all likelihood, the idiom has persisted simply because, well, it rhymes, and its catchy (“sell in May and reconsider your portfolio exposure, given your financial circumstances” probably wouldn’t have caught on).
That being said, those scoffing at the silliness of this market myth would have been very wrong this year. May of 2022 has chalked up another one for the Mayday believers, with share market volatility continuing.
The performance of clients’ Australian equities sub-portfolios has remained pleasing amidst this volatility, which is becoming de rigueur for the financial year.
We look at a volatile month in markets in an attempt to take some of the mystery out of what is happening in May.
The charts that matter
Our journey begins with a chart comparing the performance of the two market indices that matter most for Australian investors: the S&P500 and S&P/ASX300. These indices have fallen by 4.8% and 8.4% respectively* in the month of May.
*Figures quoted are for accumulation indices (i.e., indices which account for the impact of re-invested dividends) for the month of May to 13/05/2022
Two characteristics of the chart immediately stand out.
The first is the considerable volatility we have seen this year. Returns in the US market have swung almost 20% from peak to trough. Likewise, the Australian market has been as high as +7.58% and as low as -4.59% over the course of the year.
What the chart also shows is that the US market began selling off long before ours. In fact, the Australian index was largely held up in April by the performance of banks and miners. With China now in lockdown and banks on the whole reporting some rather unimpressive numbers, the Aussie market has begun catching up to the US.
Is there further to go? We are not certain. However, we are not surprised by the movement given the overall level of volatility this year. In fact, not so long ago (March) we saw the Aussie index at levels far lower than it is currently.
Like a duck in water…
While a bird’s eye view of the share market is informative, we like to think the price action we have seen has been like observing a duck in water – that is, a lot calmer on the surface than it has been underneath.
We have once again seen heavy selling in certain pockets of the market.
The chart below is a favourite of ours. It dissects the performance of the American share market (S&P500) into three buckets of stocks: the “FANGs” – (Netflix, Apple, Google et al.), loss-making technology stocks and the remainder of stocks.
Source: Minack Advisors
We referred to this in our latest monthly video as the “hidden” tech wreck.
Broadly some “optimism” we have seen over the last two years has seeped out of the more speculative parts of the market. Perhaps the poster child for this is Cathy Wood’s famed ARK Innovation fund (-70% for the financial year to date).
We can’t help but compare the line in blue to charts of manias in the past, be it South Sea, Tulip, NASDAQ or otherwise. A chart that would no doubt make Charles Kindleberger smile…
We can show similar charts within pockets of the Australian market – the newly minted S&P/ASX All Technology Index for instance casts a very similar shadow and is close to making a full round trip (since its auspicious debut in 2020).
Likewise, cryptocurrencies haven’t proved to be the inflation hedges or store or value that they were touted to be. Even so called “stable coins” purported to be pegged to fiat currency (with TerraUSD collapsing by 97% just this week):
Making sense of stories and share prices
We are always hesitant to speculate about why the stock market is behaving the way it is. Markets, much like people, are seldom deterministic.
Our role through the gyrations we have seen, has been to stick to our knitting: that is, invest in companies based on an assessment of what they are reasonably worth.
Throughout the last two years we have successfully navigated some of the “highflyers” that are now falling, not through clairvoyance, but because for us, a company’s financials have to match its story (not to say we haven’t been caught short once or twice).
And “stories” are a lot less defensible in the current environment than they once were.
Why? Currently, there is considerable uncertainty about the environment we are heading into.
Inflation continues to exceed expectations and is persisting for longer than expected. Consequently, interest rates appear to be heading higher, faster than expected. Investors are paying much more attention to price.
While client portfolios have not been immune, they have long been positioned with the prospect of an inflationary or higher rate environment in mind, and we have been pleased with their performance.
Furthermore, as the market ums and ahs, we are happy to look through the near-term volatility to find investments that we think will outperform over the medium term and preserve purchasing power.