Two weeks is a long time in politics and a long time when it comes to investment markets. The last two weeks particularly so in both cases.
The S&P 500, so dominant in equity returns of late, has fallen 6% and the US Dollar 3% relative to the GB Pound. In combination, UK investors have seen about 9% wiped off US equity values since their peak value at around the 19th of February.
The position for some of the big tech companies which have been driving US and world indices (a topic which we have commented on regularly in this update) is much worse.
Just yesterday $400bn was wiped off the value of 5 of those companies: Nvidia ($164bn), Amazon ($81bn), Meta ($71bn), Tesla ($50bn), Netflix ($36bn). Nvidia is down around 18% year to date, Tesla 35%. The Nasdaq index which focuses on tech companies on a market weighted basis is down 9.5% from its peak and 12% in GBP for UK investors.
Of course, these companies’ shares have been motoring higher in the last few years, and all are still up strongly over one year. But what the action of the last two weeks has done is completely wipe out the euphoria of Trump’s election victory in early November last year. The dollar, which had strengthened substantially, has gone back to pre-election values and the S&P 500 has wiped off all gains it made in the aftermath of the election.
Rarely is the impact of politics on investment markets so obvious. Investors were convinced Trump as president would be great for the US economy and great for big US tech. The presence of the ‘Tech Bros’ at Trump’s inauguration ceremony left us in no doubt who was in the sphere of influence, but I think few were prepared for what would happen next. Stephen O’ Sullivan gives us his thoughts on recent developments in the White House and their wider implications here.
Now investors are less sure about the impact of Trump’s actions on the US economy. Warren Buffett and others have weighed in on the damaging impact of tariffs. Musk’s DOGE rampage, short term, is creating huge job losses, impacting consumer confidence, and is being likened to the impact of austerity.
Uncertainty abounds, and markets hate uncertainty. Whether you like what Trump and Musk are doing and think it will be good for America in the long term, or whether you think they are off the rails, doesn’t really matter. In the short term, their actions and behaviour has given everyone pause for thought.
That is a dangerous situation when the values of the US big techs are (were!) in many cases at record levels relative to earnings, with sky high expectations of future profits.
Add to this the news that China’s DeepSeek can also do AI, as well if not better than ChatGPT, and has achieved this at a proclaimed tenth of the cost of Open AI, and you have a perfect storm for US tech. Many are now suggesting that the major benefactors of AI will be companies who can exploit AI in their operations rather than just the tech companies, and it is clear US tech won’t have a monopoly on AI.
Elsewhere in equity markets, the re-armament of Europe is seen as positive for growth and has sent European indices (‘B’ – As seen in the chart below) strongly higher since the start of the year. European indices in pound terms are up around 10% year to date versus World indices (‘A’), dominated by US equities and US tech in particular, down around 2%.
The next question has to be whether the trend for market weighted passive investment into World and US indices starts to reverse. Will passive index investors cling to their strategy if returns get worse and other investments start doing better?
The trend towards passive investing has amplified the success of the big US tech companies as they became more and more valuable, with every dollar invested globally this way getting tilted towards those huge mega cap companies shares.
If there started to be a swing away from passive investing, this would reverse. The biggest share sales would have to be from shares in the biggest US tech companies to return those index investors’ money, accelerating the decline of those indices.
When it comes to ‘momentum investing’ (divorced from the increases in the profits of the underlying companies but based rather on fashion or sentiment) it usually goes that what goes up in the end comes down.
For those prepared to dig a bit deeper, it is also clear that the case for passive investing in an index declines as the price of the companies dominating the index goes up.
We may have shown this table from Schroders before, but it’s a great reminder that price matters. The higher price you invest in relative to earnings, usually, the lower future return you make.
Of course there are other pulls towards passive investing, that it is cheap being one.
I noted this week that St James’s Place have publicly declared they will invest more passively, no doubt to reduce the investment costs of their funds and increase their margins. It will be interesting to see how that plays out.
Tideway's Portfolios
If you are a regular reader, you will know that this whole scenario has been very much in our sights and on our minds for some time. Whilst we have been handing back some gains in recent weeks, relatively we are doing very well.
Below we can see that losses on our Blended Equity portfolio, which was less US- and US big tech-focused than a world index fund, have been around 50% of the index losses.
Our fixed income portfolios are largely flat, as too is Ruffer, although both are still in profit year to date.
Taking S&P 500 Profits
Whilst we mostly stand firm in down turns as long-term investors, we have this time taken the opportunity to bag some profits.
We did buy an S&P 500 index tracking fund (reluctantly I might add!) just under two years ago. We were late buying it (apologies for that!), but it has been a great investment.
This week we decided to sell some and we banked a 43.5% profit on Tuesday on roughly 50% of our holding in the index. The rationale for the sale was pretty simple:
- It’s always good to bank a profit and over 20% p.a. for two years is a fabulous return. We just don’t see how this can continue.
- We see better investment opportunities elsewhere.
- We see increased risk of a major correction and are concerned around the downside risks of the index holding versus a more value orientated fund.
We haven’t sold the index to go into cash with the hope to buy it back more cheaply in the future – trying to time markets like this is notoriously difficult. We have sold it to buy another equity fund in an area of the market we think offers less risk and better future returns. We are going to look at the remaining holding next week.
On the issue of the possibility of further larger falls, these are often created when investors, who are over-leveraged, get forced to sell, or whose conviction in what they own vanishes at the first sight of losses.
The last time Bitcoin fell substantially was in October 2021, falling 75% in value in just over one year. Four years on there is now over $3trillion dollars invested in Crypto currencies, almost 60% of which is in Bitcoin. There are now ETFs which allow you to buy exposure to a Bitcoin’s price without having to buy a digital coin or share in a coin. This makes trading the price of Bitcoins much easier and accessible to many more investors. But of course, investors in the ETFs can ‘go short’ as well as ‘going long’, effectively betting on the price falling. BlackRock’s Bitcoin ETF is valued at $53 billion. Now we also have Strategy Inc., a company whose sole business strategy is to borrow money to buy and hoard Bitcoins. Strategy, currently worth about $20bn and listed on the Nasdaq, has so far bought c0.5bn coins and intends to buy more. What could go wrong?!
Bitcoins are essentially useless as an investment; they pay no interest and the only value in buying one is that you hope someone in the future will be prepared to buy it from you for more than you were prepared to pay to own it.
Warren Buffet’s Berkshire Hathaway team have not bought Bitcoin. They have just publicly sold their S&P 500 index holdings and hold a record level of cash right now. It goes without saying that the Berkshire Hathaway team and the Tideway team might well be wrong on both these calls, but for the sailors reading, it is always good to get the reef in early before the storm hits, even if that means going a bit slower for a while.
