The SpaceX IPO was undoubtedly the big market news, and the price was briefly up over 50% from launch, despite a surreal valuation. Take care. IPOs are issued at the best time for the issuer (Elon Musk), not the prospective investor (the rest of us). Jay Ritter warns us: “IPOs are systematically timed by insiders to coincide with peaks in valuations and investor”.
This IPO undoubtedly kept the pot boiling in the US, though over the last month the tech-centric NASDAQ 100 was up only 2.3%, just less than the FTSE 250. Up to yesterday, the UK indices gained 0.5%-2.5%, with the FTSE 100 being the laggard.
This small edge for the domestically-focussed UK indices implies three positive things, to which I will come back in a moment. First the overnight by-election win by the “plausible” Andy Burnham must be considered, where my working assumption is that he will soon be PM.
As I write, the UK indices are down a bit (0.5% at worst), and the rest of Europe is up a bit. There is a little hesitation as the markets try and figure who Andy Burnham really is. He wasn’t a great Health Minister. As Manchester mayor he got the buses running on time. Beyond that, and a long way from the daily political and media grind in Westminster, he was able to build a New Andy brand while mayor, and this was substantially why he did somewhat better than expected yesterday.
OK so far as it goes, but a bit lacking in substance. Can the first Tik Tok leader of the nation get over his single slogan, HOPE, and deal with the two big problems in the real world, competence and economic growth? His choice of Chancellor will be telling. If he is really ambitious, and believes he has something new to say, he will also call an early election.
With all of that in mind, the three positives for UK stock markets are:
1. Investors are willing to travel in hope, assuming the new Labour leadership won’t do anything too stupid.
2. UK interest rates will hold steady i.e. they won’t raise rates faced with a slowing economy.
3. If both of these come to fruition, there is notable upside from cheap UK small and mid-caps, and, with early and positive news on reforms, the recovery might be most marked amongst deep cyclicals e.g. construction and similar.
To prevent this Summer and Autumn morphing from a mere wall of worry to walking over hot coals we do need two of the latter to stick.
Trump’s “deal” must also stick, though the healing of energy markets will undoubtedly be stop-start. Sadly, at best it is a toss of a coin whether this sticks – even Trump’s allies quietly believe it is a moment of black comedy by a desperate Trump. Don’t lose my guide to 5 Steps To Oil Catastrophe (29th May), not for a while yet.
On the pivotal US stock market, views on the outlook remain polarised. Those focussed on valuations note that the Shiller PE or CAPE needs to fall 62% just to get back to the average long-term valuation, let alone overshoot, which is what typically occurs.
On the other hand, strategist Ed Yardeni notes the remarkable resilience of financial markets since 2020, that central banks are less likely to raise interest rates if the oil price and inflation highs prove transitory, and that this new-found stability will trigger a new confidence and peace dividend will fuel a new bull market stampede.
You don’t need to agree with either view. But you do need a stop-loss plan, and have position sizes appropriate to the downside risks which are acceptable to you. Remember, the unique stop-loss tool on FundExpert is free – you have no excuse not to use it.
Lastly this week, I was drawn to a marvellous anecdote from Robert Prechter’s Elliott Wave Theorist.
You know that the recent IPO made Elon Musk the richest man in the world. The EWT went in search of a similar individual, and it was Howard Hughes. He reached the peak of his wealth in 1966 when he sold a massive stake in the TWA airline. This was the peak for the whole market, and an ugly 16 year bear market began.
He had started Hughes Aircraft in 1932, the year of the stock market low during the Great Depression. He rode the stock market cycle perfectly from 1932 to 1966. Interestingly Musk founded SpaceX in 2002, the year of the crash low in the technology crash. Will 2026 be perfect timing for Musk, but terrible for everyone else? Time will tell.
As EWT puts it:
“Luck rewards pluck. The two men’s business creations were perfectly timed.”