Stocktake: UK election may not be ‘soft Brexit’ game-changer

Assuming stronger May means ‘soft Brexit’ is unwise given her prior support for ‘hard Brexit’

A Theresa May election victory would push the next election out until 2022, giving her more time to negotiate international trade deals after Brexit, “boosting the chance of an economic revival even after a very hard departure from the EU”. Photograph: Getty Images

Political risk has dominated the investment landscape over the last year, what with unexpected populist victories (Brexit and Trump) and months of agonising regarding Marine Le Pen doing similar in France. Now it's the UK's turn.

Britain's June election seems clearer in that a comfortable Conservative victory looks all but certain. Certainly last week's immediate market reaction was unambiguous, sterling surging as investors bet an increased parliamentary majority would make Theresa May less reliant on hardline anti-EU MPs. Even long-term sterling pessimist Deutsche Bank abandoned its "structurally bearish" stance, saying the election was a "game-changer" for the currency.

It's not that clear cut, however. As Financial Times columnist John Authers noted, assuming a stronger prime minister means a "softer Brexit" is unwise given May's prior enthusiasm for a "hard Brexit". Indeed, Pantheon Macroeconomics' Samuel Tombs cautions that an increased majority would allow her ignore pro-Remain Conservatives who have hitherto constrained her room for manoeuvre.

Victory would push the next election out until 2022, giving May more time to negotiate international trade deals after Brexit, “boosting the chance of an economic revival even after a very hard departure from the EU”.


This is all conjecture, but the point is that the outlook remains murky. Predicting election results is one thing, predicting the repercussions is another; traders tempted to make outsized bets should tread carefully.

Are big stocks propping up the market?

Is the bull market losing strength? According to Fundstrat Global Advisors, only 10 stocks – mainly large-cap giants like Apple, Amazon and Google parent Alphabet – have accounted for 53 per cent of the S&P 500's gains in 2017. Some 40 stocks (8 per cent of the index) have delivered 85 per cent of index returns.

However, Fundstrat's data is less alarming than it sounds. Typically, the top 10 stocks account for 45 per cent of index movements, according to a Wall Street Journal piece citing data from AQR Capital Management. Such a difference, tweeted AQR founder Cliff Asness, is a "complete utter non-event".

Separate data from Dimensional Fund Advisors shows index returns averaged 7.3 per cent between 1994 and 2016; that falls to just 2.9 per cent if you strip out the top-performing decile.

The S&P 500 is weighted by market capitalisation; thus, big companies like Apple, Alphabet and Amazon will always exercise undue influence. Weakening market breadth is a red flag, but there’s less to Fundstrat’s figures than meets the eye.

Stocks retreat, but bulls remain in charge

The S&P 500 recently fell below its 50-day moving average for the first time since November. Might this portend more serious technical damage?

Certainly, increased scepticism regarding the likelihood of imminent tax cuts and financial deregulation has hurt stocks lately. Shares in Goldman Sachs have given up more than half of their post-election gains; other financials have come under similar pressure and economically-sensitive sectors have lagged, with defensive stocks coming back into fashion. Almost half of S&P 1500 stocks have suffered double-digit corrections.

Conventional technical metrics indicate stocks are not oversold, so further declines are possible.

However, there’s little evidence that a serious decline is on the cards. LPL Research found 14 previous occasions where stocks fell below their 50-day average for the first time in at least 100 trading days; far from suggesting the start of a major breakdown, markets were typically higher over the following three- and six-month periods.

Furthermore, the long-term global uptrend remains intact, with major developed and emerging markets continuing to trade above their 200-day averages. Continued equity gains are normal in such environments, notes LPL; since 1990 the S&P 500 has never been lower a year later, with gains averaging 12.1 per cent.

Will stocks retreat? Possibly. Will it be consequential? Unlikely.

Young investors pile into Snap stock

Shares in photo-sharing app Snap may be outrageously overvalued and carry no voting rights, but such drawbacks are not putting off young investors.

Last week American brokerage TD Ameritrade surpassed Wall Street’s revenue expectations, with heavy trading in Snap stock helping daily client trades hit record levels.

“People buy what they know, and younger people know social media,” said Ameritrade chief executive Tim Hockey, adding that one 16-year-old had opened a trading account just to buy Snap.

Snap is also one of the most traded stocks at Robinhood, a free online trading app used mainly by young investors. Trading on Robinhood's platform hit record levels on the day of Snap's initial public offering, with almost half of the company's clients trading Snap stock. Like Ameritrade, Robinhood said many clients opened an account just to trade Snap, with the median investor aged 26.

Who knows, Snap might live up to the younger folks’ heady expectations. More likely, however, is that they will come to learn exactly why veteran investors are so sceptical about this most expensive of stocks.