Nitroglycerin: Part 2

Photo by Marian Kroell on Unsplash

6 months ago, we wrote about the potential for a bubble to form, continuing to inflate and feed upon itself, putting the market on Nitroglycerin. The feeding frenzy at the time was largely constrained to large cap tech which initially captured the public’s imagination as a result of COVID-related restrictions. 

In the 6 months or so that have followed, the same Nitroglycerin is flowing out of mega cap tech leaders into the new recipients of bubble frenzy. The retail brigade has arrived in full force.  From the explosive day-one performance of banner IPOs like Snowflake, Doordash and AirBNB to the astounding performance of some recently re-listed SPACs (e.g. Luminar and MP Materials) to the plethora of tech companies who have seen their stock prices go through the roof (Palantir, Peloton et al) – the abundance of examples of a soaring market, not just the usual FAANMG names, feeds a self-fulfilling prophecy: 

The prophecy that says that anyone who isn’t invested is missing out.  Everyone is feeling that now. 

But before we assume that this is simply a “retail-only” frenzy, think again: the reallocation into the equities market has been material and very real (data courtesy of GS): 

Frequent readers of our musings know that we’ve learnt through years of battling in the trenches of markets that no good comes from trying to pre-empt price action, and we continue to avoid doing so. As we often frequently repeat as our mantra: we invest in stocks, not companies, with the difference between the two being the collective consciousness (and imagination) of all the players in the market.

Are we in a bubble now? Perhaps in certain market segments. But then again perhaps we are in the early stages of a far broader bull market for the first time in many years.  What is striking to us is the similarities with another time not too long ago.  The great recession was characterised by a gargantuan market recovery after the crash of 08/09.  This crash played out over many months primarily due to the slow response from policymakers.  The subsequent recovery was rapid and long lasting especially in cyclical sectors and emerging markets. 

What has happened this year in financial markets has been particularly noticeable for its speed.  The crash, the policy response and the rebound all happened barely within a month, aided and abetted by the newfound market structure since the crash over a decade ago now to exaggerate market movements.  It is certainly possible that as the rally begins to broaden out across geographies, sectors and stocks, we are in the early stages of a new bull market.

Around the world, the commodities trade has caught a bid, as the inflation narrative combined with recent successes in vaccine development have given markets something to which they can look through towards normality. From copper to nickel to steel to banking to retail, these “traditional” industries are also catching a bid – albeit off much lower levels than their technologically imbued counterparts. And when we say “around the world”, we mean exactly that: from Brazil to Chile to Indonesia, from Turkey to Poland to Russia and even South Africa, the cyclical trade is on and boy is everyone enjoying themselves.

So the golden question is whether this is the end of the beginning, or the beginning of the end. We’d never take a view that any outcome is a “sure thing”, but we do chart out multiple paths that markets can take in order to get an idea of what may come.

From a big picture standpoint, the evidence suggests that there is more runway, particularly with abundant cash on the side lines…   The following charts are credited to Goldman Sachs research.

There has been a reversal of an extended multi-year allocation out of the active equities space:

So far, the biggest beneficiary of inflows has been traditional “emerging markets”:

A plethora of possible outcomes follows: a new decade of roaring twenties? Rotation from growth to value? A cataclysm of biblical proportions? Or simply more of the same?

In the end, all that stands between nitroglycerin, explosion or implosion is a small spark but as we intimated in our first piece all those months ago, one can never dream how high prices can go and one wouldn’t want to pre-empt anything.  Just remember not to believe too much of your own BS and sit back and enjoy the ride.