You’ve likely heard the old investing platitude that share markets hate uncertainty.
Just as you’ve probably heard the equally clichéd saying that share markets love easy money.
Overused at they might be, both adages hold true. And they often compete to either send share prices higher or lower.
But in the 30-odd years I’ve been following the markets, 13 of those professionally, I’ve never witnessed so much uncertainty battling it out with such a veritable flood of easy money.
So many questions, so few answers
On the uncertainty side, the global pandemic leads the charge.
How many more lives will be lost? Will there or won’t there be a vaccine? What impact will a second wave have if it sweeps the northern nations during their upcoming winter? These are just a few of dozens of uncertainties surrounding the pandemic’s impact on global economies and share prices, and of course our very lives.
But it’s far from just COVID-19 driving investor insecurities. Other uncertainties abound.
Brexit is back on the front burner, with no clear exit agreements yet in place for the United Kingdom to part ways with the European Union.
China is more of a wild card than ever. Both in its trade disputes with the United States and with its growing political rift with Australia. If you know how that’s going to turn out, drop us a line!
Add to that the upcoming US presidential election and top it off with the growing odds of sovereign or major corporate defaults as debts pile up — no guarantees, mind you — and you can see why many people are hesitant to invest in shares.
While that’s understandable, it’s also likely to be a costly mistake.
Just how negative can interest rates get?
Having touched on the uncertainties with the potential to drag share prices lower, let’s turn to the easy money side of the equation. The one with the potential to send share prices much higher.
I won’t cover off all the central banks that have highly accommodative policies in place, because that list covers most all of them.
Between them, global central banks have unleashed trillions of dollars in quantitative easing (QE). And they’ve driven interest rates down near zero. The Reserve Bank of Australia (RBA), with its bond buying and 0.25% official cash rate, is no exception. And neither record high levels of QE nor record low rates show any signs of abating in the foreseeable future.
In fact, more central banks are inching towards negative interest rates, which have already been put into place by the European Central Bank (ECB) and Bank of Japan (BoJ).
While RBA Governor, Philip Lowe, has effectively ruled out going negative, the same can’t be said across the ditch.
Last month, the Reserve Bank of New Zealand (RBNZ) opted to keep New Zealand’s cash rate at its already record low 0.25%. However, the bank revealed that negative interest rates were part of “a package of additional monetary instruments” it’s actively preparing for.
That statement was delivered before the full impact of the country’s lockdown on the economy was known.
Yesterday, Statistics New Zealand shed some light on that impact. The report revealed that the Kiwi economy shrank 12.2% in the June 2020 quarter. That’s the biggest fall on record. And GDP per capita declined even more, down 12.6%.
Now the RBNZ hasn’t made any new announcements on negative rates. But, according to the Australian Financial Review (AFR):
New Zealand’s central bank has asked the big four Australia banks – which dominate the country’s banking system – to make sure they are technically and legally ready to handle a negative cash rate by the end of the year.
Meanwhile, on the other side of the world, the Bank of England (BoE) is rushing down the same path. Also from the AFR:
The Bank of England has jumped on the bandwagon of negative interest rates, revealing late on Thursday (AEST) that its monetary policy committee is actively considering the technicalities of how to cut the benchmark rate below zero.
Don’t fight the Fed
Tom Lee is the Managing Partner and the Head of Research at Fundstrat Global Advisors and the former Chief Equity Strategist at global investment bank, JPMorgan.
When balancing the uncertainties in one hand with the easy money environment in the other, he has a simple answer to share market investors, “Don’t fight the Fed.”
As quoted by the AFR, Lee understands that investors are fearful faced with a once in a century pandemic and “the worst Depression in five lifetimes”.
But he’s still optimistic, saying:
I learned a long time ago that the stock market doesn’t care about my opinion and rather, my time is better spent trying to understand the message from the market. And we think the underlying message is one that remains constructive. That is, we think there are many factors that explain the extreme resilience of stocks in 2020.
Chief among his reasons to be bullish, in his case on US shares, is the Fed’s continuing monetary support. Lee is also highly bullish on technology:
Another key driver for US equities, in our view, is the world is facing a structural labour shortage. This is something we have written about since 2018 (the first year this took place) and if the world has population growth exceeding labour supply, this output gap/ worker shortage is solved by increasing reliance on capital-based labour, aka technology.
While on the subject of technology…
The dip in tech share prices could be a great buying opportunity
Yesterday, overnight our time, the NASDAQ-100 (NASDAQ: NDX) dropped again, closing down 1.5%. That puts the tech-heavy index down 10.8% from its 2 September all-time highs.
Tech shares on the ASX are heading the other way today, with the S&P/ASX All Technology Index (ASX: XTX) up 1.1% in early afternoon trading. Though it, too, is still down 8.5% from its own record highs of 25 August.
If the world’s rapid pivot towards more technology-oriented working, shopping and socialising supported by a flood of easy central bank money indeed outweighs the great list of uncertainties, then both these indexes, and the shares that comprise them, should enjoy some more big gains in the months ahead.
One way to gain exposure to the biggest US technology shares is the Betashares Nasdaq 100 ETF (ASX: NDQ). NDQ holds the largest non-financial 100 companies listed on the Nasdaq, including all the FAANG shares.
NDQ’s share price is down 10.6% since 3 September. Year to date, the share price is up 18.4%.
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Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BETANASDAQ ETF UNITS. The Motley Fool Australia has recommended BETANASDAQ ETF UNITS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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