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2018 - “Peak Year”

Posted by: Brian Dennehy
Membership level: Free
We were recently contacted by a journalist to get our thoughts on key events in 2018. I couldn’t move beyond the idea of lots peaks.  It’s always dangerous to call even one of the peaks – the scope for egg on your face in a years time is very high!  Nevertheless… 

Sadly, when we look back on 2018 it probably was not peak “Brexit hysteria” (that might have years to run).  Nor peak “voter discontent” throughout the Western world – the unhappiness we’re seeing is not about Trump, nor Brexit, nor the impact of those nasty bankers in 2008. Those are symptoms but not causes.   It’s about debt, demographics and the impact of technology.  The first two certainly aren’t going away, and have been at play for at least the last two decades.
So what peaks do we have?
  • Peak Dow
  • Peak Trump
  • Peak Complacency
  • Peak Apple
  • Peak Passive-Aggressive
Peak Dow
The peak was 26,951 on 3rd October.  This is either important or VERY important.  We are midst a correction of 20-30% (after which there will be another much more significant peak) or something much nastier (in other words that “significant peak” is already in).  I hope it is merely the former – but “hope” is not an investment strategy.  Whatever the scale of the U.S. falls they will be more or less replicated in the UK.
In January we commented on the rise of the Dow:
“20,000 was brushed aside, and as I write the Dow Jones Industrial index is toying with 26,000.  It is strange that from time to time stock markets do get stuck at round numbers.  Put another way, markets also get drawn towards such round numbers…Where we are now in market terms is both scary and exciting, as this mania continues to unfold.”
Peak Trump
Peak Trump was Saturday 6th October, when the Senate confirmed Brett Kavanaugh as a Supreme Court justice.  The Trump momentum was most obviously lost with the midterms on 6th November, when he lost the House of Representatives, and a range of nasty possibilities were opened up.  This will get worse in 2019 as the sugar rush from the tax cuts and reforms wears off.
Trump is a past master in the art of distraction. But add in the impact of wealth inequality and increases in productivity pushing up unemployment and Trump will be in for a tough 2 years in the run-up to his re-election bid.
“He can blame a raft of others if the market cracks widen, but The Magic Man will need to pull a very large rabbit out of the hat to counteract the factors which would ordinarily pull the market much lower. You can bet he will give it a go – the how will be interesting.”
Peak Complacency
This is most clearly evidenced in the bond market.  Back in May a 30-year veteran said “it’s easier to raise money than at any time I’ve been in the business over the past 30 years”.  Another bond expert highlighted that the new bonds offered “some of the worst covenants we’ve ever seen” – to you and me that means they were dog poo. And in August the tide began to go out and one bond fund manager was found to be wearing no trunks – GAM had to begin liquidating £5.8 billion from a range of its absolute return bond funds.  This was “disturbing” action (as the FT put it) for a supposedly diversified fund.  There will be more of the same, much more.
In our report released in January and updated in February – Opportunity Knocks or Apocalypse Postponed? Probably both. – we said:
“The quality in new high yield bond issuance is horrible. Covenant-lite bond issuance is rising…from 10% of the total 4 years ago to 30% today. Cov-lite means the bond issuer has more ways to wriggle out of their commitment.
As one broker in New York put it: “Bond terms never got this bad in 2007. The contracts… are the worst they’ve ever been.”
You don’t get correction in these sorts of bonds – you just get wiped out.”
Peak Apple-cum-iPhone
This was the year when Apple suddenly didn’t have all the stats to hand telling us how many iPhones they had sold – 1st November to be precise.  Funny that.  Those following events closely, and more dis-passionately, are already out the door.  This could get ugly in 2019.  Keep an eye on results from their component suppliers.
Peak Passive-Aggressive
If only a couple of this list come to pass in the next 12-24 months, the passives market, particularly ETFs, is going to get a good kicking, as many investors (large and small, expert and novice) realise that ETFs are a very aggressive choice, and that they might just need to do something more intelligent than chase low charges.
In July 2017, in part II of our Boom, Bubble, Bust series we said:
“…the behaviour of investors buying passive funds, particularly exchange traded funds (ETFs), are increasingly marking out 2017 as the euphoric, bubble, stage in a bull market which began in 2009.
It is typical with investment bubbles that a sensible financial innovation is hijacked, and investors increasingly dis-engage brain.  Herding and greed become prevalent.”
What should investors do?
We’re no fans of market timing, as regular readers will know, so we aren’t saying these peaks won’t be surpassed. The Dow could keep rising, Trump could surprise us, humans can certainly be more complacent, Apple might have a resurgence and the ETF mania could continue. All those are possibilities.
Just because something is possible doesn’t mean it is probable. The cumulative impact of all these peaks happening at the same time should serve as a flashing red light to investors. Don’t fall into the trap of thinking “this time is different”. It usually isn’t…
Topic: Market commentary


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