StockTake: Sterling’s slide looks set to continue

Pro-Brexit zealots love to point to the rising FTSE 100 as proof that the so-called Project Fear campaign overstated the risks of leaving the European Union, but sterling’s slide below $1.30 suggests otherwise.

Sterling had not fallen below the much-watched $1.30 level since the immediate aftermath of the referendum result, but signals from the Bank of England regarding further quantitative easing meant technical support gave way last week.

HSBC cautions the "adjustment is not over yet"; it expects sterling to fall to $1.20 by the end of the year and to $1.10 in 2017. Merrill Lynch also expects further weakness, noting sterling's decline against the dollar thus far is "around half of the average peak-to-trough falls seen during previous UK idiosyncratic crises".

Precise price forecasts are a mug's game, of course, but July's half-hearted sterling rebound always resembled a dead cat bounce. Trying to catch the bottom in a well-established downtrend that has seen sterling fall from $1.59 to $1.29 over the last 14 months is not advised: as trend traders like to say, don't be a hero. Dr Doom predicts carnage – again We're all on the Titanic; a colossal asset inflation will burst; the S&P 500 will halve. Apocalyptic language comes easily to Marc "Dr Doom" Faber, who garnered headlines aplenty last week after issuing his usual dire market forecast.

Faber proves that being wrong is no barrier to getting airtime. He issued the same Titanic analogy in January, just prior to a furious market rally.

He’s also fond of referring to 1987-style crashes: Faber-related headlines in recent years include “Markets could crash like 1987” (2015); “2014 crash will be worse than 1987’s” (2014); “Look out! A 1987-style crash is coming” (2013); and “We could experience a 1987-style crash this year” (2012).

In the earlier stages of this seven-year bull market, hyperinflation was his big concern, saying this was “more a question of when it will happen rather than if it will happen” (2010) and that he was “100 per cent sure that the US will go into hyperinflation” (May 2009).

Dr Faber’s self-confidence remains intact, however. His many critics, he scoffed last week, “have no money”. After seven years of money-losing advice, StockTake would suggest Faber’s critics probably have a lot more money than his followers.

Market rally continues to broaden Among Faber’s current concerns is the “narrowing” market leadership. “It’s not that many stocks that have been making new highs,” he cautioned last week, “it’s quite a narrow growth of stocks that have been very strong.”

Really? On August 8th, 424 stocks hit 52-week highs – the most since October 2013. Almost half of S&P 500 stocks have hit 52-week highs over the past three months. Small-cap stocks are no longer lagging; the Russell 2000 hit 52-week highs last week and is up 30 per cent since February’s bottom.

There has also been a “constructive” rotation from defensive to cyclical sectors, notes Jonathan Krinsky of MKM Partners, with the biggest gains accruing to “highly cyclical sectors such as technology, materials, and financials”.

This is not a “narrow” rally. It is a very broad-based one characterised by especially marked strength in small-cap and cyclical sectors, suggesting investors will continue to buy the dips in the coming months.

Market timing costs investors Faber is not the only investor liable to questionable market timing; most investors are awful timers, according to blogger and Ritholtz Wealth Management researcher Michael Batnick.

Including dividends, the S&P 500 has gained 270 per cent since March 2009. However, while the largest S&P 500 exchange-traded fund (ETF) grew at an annualised rate of 18.08 per cent: investors in the same ETF earned just 11.82 per cent annually, according to Batnick’s analysis.

“People think that sitting through a bear market is one of the hardest parts of investing,” says Batnick, but “sitting through the recovery is no walk in the park either”.

Zika virus should not spook investors There’s been much chatter as to whether Brazil’s hosting of the Olympics might worsen the global spread of the Zika virus but history indicates it’s not an issue that should concern investors.

A Charles Schwab note last week examined the impact of 10 health epidemics on global markets over the past 35 years. Three months later, stocks were higher on eight occasions; six months later, stocks had gained on all but one occasion.

Three of the more recent high-profile events have been the 2003 Sars outbreak, 2006’s avian flu and the 2009 swine flu epidemic. Nevertheless, the Sars outbreak only “briefly” affected markets; the much-hyped 2006 swine flu “only had a small measurable effect on the markets”; the US government declared the 2009 avian flu to be a public health emergency but markets “failed to react to this news”.

It’s easy to imagine a Hollywood-style “nightmare scenario”, notes Schwab, but markets have been “relatively immune to the effects of past epidemics”.