Don’t cry over tech selloff – it’s still the top performer
Stocktake: Tech stock fall is factor-led. Plus: Trump’s tax cuts; Weinstein’s ‘comeback’
US president Donald Trump and US vice president Mike Pence: investors seemed underwhelmed by Trump’s tax cuts. Photograph: Carlos Barria/Reuters
Technology stocks have just suffered another week of underperformance, prompting much chatter as to whether investors are having second thoughts about tech. However, such agonising might be misplaced. Firstly, rather than “crying over the performance of the technology sector”, investors need to note that it has still outperformed every sector by more than 15 percentage points this year, as Bespoke Investment Group notes. Tech stocks are up almost 35 per cent, roughly double the S&P 500’s return. Secondly, Bespoke says, tech stocks are not the only losers; rather, investors have rotated out of 2017’s biggest winners and into underperforming stocks, a point also made by Société Générale’s Andrew Lapthorne.
Today, computer-driven funds increasingly bet on market factors like momentum, value and low volatility. Until recently, momentum stocks were 2017’s big winners, whereas value stocks underperformed. Now, crowded trades are being unwound, temporarily hurting 2017’s biggest winners. “We’ve seen this before,” says Lapthorne. “Everyone makes a song and dance that tech stocks have fallen, but then you scratch below the surface and it looks factor-led.”
Ungrateful investors unmoved by Trump’s tax cuts
Donald Trump must have been disappointed by the muted reaction to the US Senate’s vote on tax cuts. “With the great vote on Cutting Taxes, this could be a big day for the Stock Market,” he tweeted. Instead, the S&P 500 declined slightly while the Nasdaq fell over 1 per cent. Trump might be unaware of the old adage about buying the rumour and selling the news; stocks bounced in the fortnight prior to the vote so the news was priced in.
That aside, the future impact of tax cuts on markets remains hotly debated. Merrill Lynch strategists Michael Hartnett and Savita Subramanian suggest its importance is overstated, arguing it will provide a one-off earnings boost but not much more. However, Merrill’s foreign exchange strategist David Woo reckons markets are underestimating the impact of tax cuts. He expects lots of cash parked outside the US (much of it presumably in Ireland) will be repatriated once rates are slashed. The end result will be a big boost for the dollar, weakness among emerging market currencies, higher US rates, a bigger trade deficit with China and the possibility of increased currency tensions with Beijing. Woo’s contrarian stance is speculative, but not implausible. If he’s right, Trump may continue to be puzzled by investors’ apparent ingratitude.
Is Woodford’s bubble talk a lot of hot air?
“Extreme and unsustainable valuations”, a “bubble” that is “even bigger and more dangerous” than the 1990s dotcom mania, one that will “inevitably” burst – clearly, Neil Woodford isn’t a raging bull. Britain’s most high-profile fund manager came out fighting in a recent Financial Times interview, saying he was “utterly convinced” his contrarian stance – he has loaded up on unloved British assets and believes the FT “has gone a little bit mad” in its Brexit coverage – would be vindicated. Woodford deserves some credit: highly-paid active managers should be unafraid to go against the herd, rather than behaving like closet indexers.
However, talk of a market bubble seems hyperbolic, almost desperate. Woodford’s flagship fund has shrunk from £10.1 billion to £8.2 billion over the last nine months amid a spate of investor withdrawals, but his underperformance can be traced to some bad bets and a nonchalant attitude towards Brexit (Woodford seemingly thinks all mainstream economists are wrong). Ironically, the FT’s Lex column notes some of Woodford’s biggest holdings, such as biotech firm Prothena and venture capital firm IP Group, are speculative, expensive stocks, while he has also invested in UK housebuilders and unlisted start-ups. If financial markets are in a bubble that will inevitably burst, are these really the kind of safe-haven stocks you want to be holding?
Tudor Jones bets on Weinstein ‘comeback’
Billionaire hedge fund manager Paul Tudor Jones is famous for his keen sense of judgment on financial markets. Alas, the same cannot be said of his judgement on more human matters. “I love you,” Jones wrote in an October 7th email to disgraced Hollywood producer Harvey Weinstein, the New York Times reported last week. “The good news is, this will go away sooner than you think and it will be forgotten!” Focus on the future, added Tudor Jones, “as America loves a great comeback story”. This isn’t the first time Tudor Jones has become embroiled in controversy. “You will never see as many great women investors or traders as men,” he said in 2013, because having a child is a “killer” when it comes to investment performance. “As soon as that baby’s lips touched that girl’s bosom, forget it,” he said. It happens “over and over again”. Hedge fund managers are not graded on their moral judgments, but Jones’s investors might be concerned by the Weinstein email. To quote Dealbreaker’s Thornton McEnery, “Morality aside, how will Tudor survive this scandal if you are making predictions as stupid and terrible as this one?”