The stock market and society are opening up
Every investor around the world is wondering why stock markets are rising. The simple answer is because no one wants or expects it (!); everyone is waiting for a downturn, and at that point it seldom happens. The slightly more serious answer, after another strong month for equities, is that every number that comes in – no matter how bad – is better than the last one. May’s macro numbers were indeed terrible, but better than in April. And this is likely to continue for a while.
The stimulus is massive, bigger than ever, the bond market is easing, the price of oil is rising, and despite all the tragedies the health care system seems to be coping.
We have said it before and will say it again: the second quarter will be as black as night, but everyone knows that. If there is just successive improvement towards the summer, and if China and the US do not crash too far, this could continue for a while, even if there is short-term profit taking.
How about the second wave of the virus? It will certainly come, but everyone is prepared and expects it, so it is unlikely to be a shock or a black swan, unlike the first wave that took us all by storm.
“Note that nobody – nobody! – expects higher interest rates.”
A bigger surprise would be if long-term interest rates suddenly rose. Note that nobody – nobody! – expects higher interest rates. But if it happens, a lot of technology stocks that are priced for ever-increasing growth at bizarrely low required yields could be a real thorn. And the banks would go the other way unless bad debt losses are too high.
As the market has sought out a lot of cyclical shares, which we already own, we have tried to look the other way and buy what nobody wants, including Essity and Tele2. Both these companies have stable profits and products that we must have.
We have also increased our stake in ABB, which is moving from debt to cash after the sale of Power Grids; and perhaps the biggest Swedish share buyback of modern times will soon begin, which limits the downside.