Market Comment - February

During the past four weeks, we have witnessed record inflows for European equities, pushing the already extended Stoxx 600 index to new record highs. Now the market looks even more exuberant, and we can’t change our view that such a setup will be difficult to stomach in the coming weeks.

The S&P 500 remains in a trading range, and as previously mentioned, the outperforming sectors cannot fully compensate for the weakness we are seeing in large cap technology stocks as well as in discretionary sector components.

We have been writing about technological revolutions before. Looking at today’s markets, it is a fascinating theme more than ever. The ultimate bible helping us to navigate is Carlota Perez’s book “Technological Revolutions and Financial Capital” – The Dynamics of Bubbles and Golden Ages.

Since 1771, technological revolutions lasted between 43 and 66 years, divided by an installation and deployment phase. The start is defined by a “big bang” which starts the installation phase. Perez argues that for the age of information and telecommunications, the big bang happened in 1971 with the invention of the microchip. The installation phase ended with the crash in 2001, because every installation phase ends with a frenzy, aka a bubble and crash.

The important point we want to make here is that Artificial Intelligence is merely a part of the synergy phase within the deployment phase. It is not a technological revolution. If so, the current technological revolution is in a late stage, because it started in 1971. We could have been in the synergy phase for the past 20 years. Robotics, Cloud Computing, Artificial Intelligence — all could be synergies within the same technological cycle that started in 1971.

How do we know that we enter the maturity phase? Perez describes it as the twilight of the golden age, though it shines with false splendor. It is the drive to maturity of the paradigm and the gradual saturation of markets. New products have a shorter lifecycle, unfulfilled promises are piling up, while most people nurtured the expectation of personal and social advance.

The result is an increasing socio-political split. Capitalism had been making too many promises about social progress and not delivering enough, showing too much capacity for wealth creation and not distributing enough. The workers’ protests seeking salary increases and greater security or participation are sometimes echoed and magnified by those of others who may also feel defrauded by the system, such as women, immigrants and any others who feel marginalized from the wealth of what some claim is a ‘great society’.

Mergers and acquisitions will be another characteristic of the maturity phase. The stage is set for the decline of the whole mode of growth and for the next technological revolution. When, if and how we get there, the market will show.

During the past weeks, the “fear word” we have been hearing the most is “disruption”. Meanwhile, the technology sector has been lagging, drowned by a very weak software sector, with the iShares Expanded Tech-Software ETF losing 9.58%. They call it disruption fears.

US mid-caps once again outperformed large caps by 6.39%. Sectors witnessed again large divergence, with utilities gaining (XLU +10.33%) while financials (XLV -3.78%) and technology (-3.57%) underperformed strongly. With consumer staples outperforming as well (XLP gaining 7.80%), we can once again argue that investors still prefer defensive sectors.

Best performing industry group was Gold Miners, which recovered all the losses of the January heavy metals crash. In our plan, we expect another strong correction in the price of Gold from April until July. Currently though, the market says short gold, buy gold miners.

The strong performance of crude oil, which rose 3.19% in February and now trades up 17.19% year-to-date, is helping the CRB Commodity Index once again towards the top of the trading range. With the escalation of the Iran conflict, the CRB could be moving into breakout territory.

But here comes the problem. The rise in Crude Oil is currently based on geopolitical risk, and we do not like that. A geopolitical spike in the price of Crude Oil is detrimental to our long-term bull case. There are many long-term fundamentals that support our bull thesis — we don’t need a war for this. Unfortunately, the current conflict makes things more complicated.

Usually, when the market drops because of Donald Trump’s stupid ambitions, we see the TACO trade. Let’s see what happens next.