As we head into Halloween month, TEAM Executive Chairman Mark Clubb shares insights on beating the fear factor when the market gets scary.
If there’s somethin’ strange
In your neighborhood
Who ya gonna call?
If it’s somethin’ weird
And it don’t look good
Who ya gonna call?
I ain’t afraid of
no ghost(no growth)
I ain’t afraid of
no ghost(no growth)
If you’re seein’ things
Runnin’ through your head
Who can you call?
As you can see above, I have allowed myself to change the original Ray Parker Junior lyrics.
As we move into Halloween month, October, investors are hearing creaking floorboards and doors, seeing apparitions and sensing ghostly presences with disembodied footsteps. The sound of a distant woman sighing. (Not Janet Yellen or Angela Merkel).
Much like Halloween when we are encouraged to frighten each other, commentators and market pundits are trying to frighten investors out of the haunted house that is the equity market.
We are reminded of the financial bloodbath that was infamously termed “Black Tuesday”: the financial crash of October 29th, 1929. The market fell 90% from peak to its depth and images of poor investors jumping out of windows symbolised the carnage.
Then we had “Black Monday” in October 1987, a similarly gruesome horror show. No wonder investors are edgy – and edgy they are. The “fear factor” is at a high.
This is the stuff of Stephen King, Mary Shelley, Edgar Allan Poe and Bram Stoker.
Market corrections are like ghosts. There is no warning or gentle introduction allowing investors to sell in an orderly manner, protecting what gains they have.
No, the windows burst, the lights fail, the TV goes weird, broadcasters utter distant voices of doom and warning. Terror abounds.
In ghost stories, typically there is a lead poltergeist, a ghost or other supernatural being supposedly responsible for these physical disturbances.
My 2020 equity ghost story features the utterly terrifying “stagflation”. Images of the 1970s’ double-digit inflation and long queues for petrol and food items haunt markets. It’s a scenario that’s basically the worst of all worlds for the average person because it causes real incomes to stagnate or decline due to little or no economic growth, while destroying buying power with inflation or the rises in the cost of living. Everything costs more, including essentials such as food and household items. People and the economy truly get poorer.
No wonder investors are hearing bumps in the night and creaking floorboards together with the TV not working properly. We have the ghost of “volatility” making a return. Everything was calm a couple of months ago, and now all hell has broken loose.
The “hell breaking loose” this time was when the US 10-year Treasury yield broke above 1.5%, continuing its sharpest rise since February. The 10-Year Treasury is a major barometer for how traders are feeling about the market and inflation-risk. Traders are worried about “stagflation”.
So, what are the “ghost busters” for the spectre of “stagflation”? Well, I leave that to Franco Modigliani, now deceased, a finance professor at the Massachusetts Institute of Technology who would go on to earn a Nobel Prize in economics in 1985. He argued that stock-market investors were suffering from “inflation illusion” in failing to understand that stocks are a good long-term inflation hedge.
Now is a bad time not to be investing in stocks, particularly those companies that have pricing power or some form of essential nature. Companies that can pass their rising costs of production on to customers, such as those in the consumer staples sector like TEAM International Equity Fund holdings, Procter and Gamble, Nestle, and Estee Lauder or “essentials” like Apple (phones), Shimano (bicycles) or Sony and Walt Disney (entertainment and games). More than 50% of the TEAM International Equity Fund is invested in “essential” and consumer staple companies.
Consumer Staples represent just over 22% of the Fund.
Every company we own is forecast to grow this year, on average 12.5%.
Perhaps more importantly, the Fund’s companies are forecast to increase their dividends by 14.35% this year (2021)
These are our gloves of garlic, our wooden stakes and our crucifixes. They are our proton packs, the fictional energy-based capture device, used for capturing and entrapping ghosts in the Ghostbusters film.
Now is a bad time for keeping money as cash, or some kind of cash equivalent e.g., bank accounts, money market funds, fixed deposits etc. I also wouldn’t recommend any kind of bonds (other than inflation indexed bonds) as the high inflation will just eat away at the fixed coupon and principal payments. Cash is not king during inflationary times.
I don’t want to get too technical. But we need to explain this paranormal phenomenon called “volatility”. We need to understand what volatility is and how it works. We don’t need an exorcist or Bram Stoker.
Volatility can be the result of sharp share price increases or decreases over a short period of time. Therefore, when prices are stable or increasing/decreasing by small amounts, this is when we say that “volatility is low.”
The speed of price movement and the rate of change in asset prices in either direction is unpredictable.
When there is more speed and greater rates of change, this is known as increased volatility.
This volatility is commonly associated with fear — especially when stock prices fall by several percentage points in a matter of days, as we have seen.
But I’d argue that it really should be associated with opportunity.
The most important thing to remember is this: markets require price movement, and that is where you find opportunity.
You can’t make money if stock prices don’t change. And you’ll have a very dull and pointless stock market if everything just stays the same. So, when significant movement starts to happen, the trick isn’t to panic. Instead, the trick is to recognize how you can take advantage of the situation.
We use a tool called VIX to follow market fear or volatility. More precisely, the CBOE Volatility Index. This forward-looking index is considered the market’s “fear gauge” for a reason. It is a measurement of how investors expect the S&P 500 to perform in the next 30 days.
So, if you followed the VIX on last Monday afternoon, it sat at 18.14.
By 10:30 a.m. on Tuesday, it surged by 32.5% to 24.03.
That’s when the new owners of the haunted house went berserk.
The subconscious took over and the flames were fanned by all the reasons to be fearful: energy prices, oil, inflation, stagflation, supply chains, recession, China, politics, consumer sentiment, business confidence, property markets, liquidity, bond yields, stock prices... you name it, someone is worrying about it.
Some owners in the neighborhood sold up at “fire-sale” prices. Spooked out. We had sharp pullbacks in the S&P 500 in recent days.
It is true that when the VIX rises, normally the S&P 500 will decline. But an uptick in volatility also correlates with larger short-term losses as many investors head for the exits.
The problem, unfortunately, is that investors who sell based on short-term fear historically underperform the markets. So instead of selling, longer-term investors should take advantage of this fear. Remember, stocks need to move so that you can make a profit.
So, when you hear the term “buy the dip” during a sell-off, you’re taking advantage of volatility and investor fear. This allows you to exploit the long-term upward bias of the markets. You buy the supposed “haunted house” cheap.
As long-term investors we should expect market downturns to happen regularly and at any time of year, not just October – but over the long run, gains sharply outweigh the short-term losses during those downturns.
At TEAM, we ain’t afraid of no ghosts or no [economic] growth.
We invest in growth companies, companies that increase their revenue and earnings at a faster rate than the average business in their industry or the market as a whole. Companies whose products or services we all use every week. We all spend money with them. We are their customers and clients one way or another.
These are companies that can grow faster than average for long periods, which will ultimately be rewarded by the market, delivering handsome returns to shareholders in the process. And, the faster they grow, the bigger the returns can be.
I recommend we focus on the fundamentals and facts that can positively impact our investments in the long term.
So, for Halloween I will decorate my house, buy the sweets for “trick or treat”, dress up as a witch or ghost on Halloween, and enjoy the fright-fest that October celebrates.
But I won’t be worrying about my stock market investments (TEAM International Equity Fund).
Even if a downturn happens, at TEAM we understand it is perfectly normal and it won’t change the long-term promise of the great companies we have our clients’ money invested in and our own.
In the short term, October also sees most companies report June to end September results. FactSet expects the S&P 500 to report on average 27.6% earnings growth and 14.9% revenue growth.
Fourth-quarter estimates still remain very positive, with FactSet anticipating 21.5% average earnings growth and 11.4% average revenue growth.
Lastly, historically, in the U.S. equity market, the fourth quarter is notoriously the best three months of the year for the stock market and October kicks it off.
Disclaimer This document is issued by Theta Enhanced Asset Management Limited and does not constitute or form part of any offer or invitation to buy or sell shares. It should be read in conjunction with the Fund’s Prospectus, key investor information document (“KIID”) or offering memorandum. Theta Enhanced Asset Management Limited is authorised and regulated by the Jersey Financial Services Commission, registration number 80836. The Company’s registered office is 10 Hill Street, St Helier, Jersey JE2 4UA. The price of shares and income from them can go down as well as up and past performance is not a guide to future performance. Investors may not get back the full amount originally invested. A comprehensive list of risk factors is detailed in the Prospectus and KIID and an investment should not be contemplated until the risks are fully considered. The Prospectus and KIID can be viewed at www.team.je and at www.geminicapital.ie The contents of this document are based upon sources of information believed to be reliable. Theta Enhanced Asset Management Limited has taken reasonable care to ensure the information stated is accurate. However, Theta Enhanced Asset Management Limited make no representation, guarantee or warranty that it is wholly accurate and complete. The TEAM International Equity Fund is a sub- fund of GemCap Investment Funds (Ireland) plc, an umbrella type open-ended investment company with variable capital, incorporated on 1 June 2010 with limited liability under the laws of Ireland with segregated liability between sub-funds. GemCap Investment Funds (Ireland) plc is authorised in Ireland by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (S.I. No. 352 of 2011) (the “UCITS Regulations”), as amended. Gemini Capital Management (Ireland) Limited, trading as GemCap, is a limited liability company registered under the registered number 579677 under Irish law pursuant to the Companies Act 2014 which is regulated by the Central Bank of Ireland. Its principal office is at 118 Rock Road, Booterstown, Co Dublin A94 V0Y7 and its registered office is at 1 WML, Windmill Lane, Dublin 2, D02 F206. GemCap acts as both management company and global distributor to GemCap Investment Funds (Ireland) plc. GemCap UK Limited Ltd provides distribution oversight services to GemCap acting as global distributor and is responsible for the oversight of all distribution arrangements for the sub-fund