In Bizarro World – a creation of Superman publisher DC Comics – nothing is like you’d find it back on earth. Bizarro Superman is an ugly specimen who spends time reshaping his home planet from a sphere into a cube as punishment for being too perfect. And Batzarro – the Bizarro Batman – calls himself “The World’s Worst Detective”. It can be amusing to see things turned upside down – whether in a comic, or in serious drama like Amazon’s smash hit The Man In The High Castle, in which America has been carved up between Nazi Germany and its Japanese allies in an alternative version of history. But it’s not quite so entertaining when it’s happening to your portfolio.
The wrong sort of woe
2016 has already been one of the weirdest years for investors for some time. Perhaps everything will make sense with hindsight, but at the moment it seems to be bamboozling the markets and prompting huge volatility. Now, I did think we were due a choppy period. If you’ve been taking notes, you might remember my FICKLE year theory from late last year. The acronym was meant to highlight how we could expect big moves in bonds, currencies and the emerging markets – and how, combined with the high amount of leverage in the system, that could cause some instability. Which might seem like a reason for me to take a victory lap. Except that like the vast majority of market watchers, I expected a different sort of volatility.
At the start of the year, the consensus was that Janet Yellen at the Federal Reserve would raise interest rates three or four times this year. Such rises would have global consequences, by strengthening the value of the US dollar for instance, and potentially making overseas debt, particularly in the emerging markets, unappealing. However, in less time than it takes to say “What, February already?” those expectations have gone out the window. The markets now judge there’s less than a 30 per cent chance of even one more rate hike in the US this year. A cornucopia of factors have confounded the Fed’s plans, from the Japanese Central Bank introducing negative interest rates to more bad news from China, slowing US jobs growth, and an increasingly morose global economy. The UK Bank of England is no longer thought likely to raise interest rates this year, either – and that’s partly a result of the changing picture in the US.
Don’t bank on it
I expect most Collective members understand these changes in expectations are of more than academic interest after years of Central Banks and their bosses – Janet Yellen in the US, Mario Draghi in Europe, and Mark Carney in the UK – holding centre stage. But if you need more convincing, consider the performance of big bank shares in 2016, which are down 30-50 per cent across the globe in just a matter of weeks. Interest rates had been expected to rise as the world economy strengthened – both factors that should have been good for the biggest banks. But now yields are flattening and people are worrying about an imminent recession, even in the US. And bank shares have been hit for six.
Or consider miners and oil giants. Left for dead by many investors at the end of 2015, they’ve actually had a relatively good 2016 so far. Okay, the likes of Royal Dutch Shell and BHP Billiton have fallen 1.5 per cent and seven per cent year-to-date, respectively, but that’s much better than the nine per cent drop in the FTSE 100. Again, it’s the Bizarro World effect. Traders were betting on a stronger dollar, but it’s been weakening recently, which means it takes more dollars to buy most commodities – which are priced in dollars – and that in turn means potentially higher prices and higher earnings for hard-pressed producers. That’s one reason why miners and energy firms have caught a bid. But actually, if we’re starting to fear a protracted global recession then shouldn’t these suppliers of the raw fuel of economic expansion be sold off? Not in Bizarro World. And equally, is it likely we’ll see a big recession when oil prices are so low, and presumably giving a huge boost to most of the world’s bottom line? In Bizarro World, apparently that is a possibility.
Finally, consider that one of the best performing shares of 2016 so far has been Randgold Resources. It’s risen a whopping 44 per cent on the back of a rising gold price – yet another thing almost nobody saw coming when the year began. To cap it all, even as the ultimate old-fashioned asset has found renewed favour, technology shares that dominated returns in recent years have slumped. The key US NASDAQ technology index is down 16 per cent already this year. Yet another stunning reversal of fortune.
Of course, there may well be rational reasons to explain these shifts. In the fullness of time we’ll be better placed to know where the market was correctly discounting a changing economic landscape, and where investors were perhaps getting a bit carried away – or even emotional. I’ve had fun with my Bizarro World motif, but I don’t think rationality has entirely broken down. However, I do think the big reversals of 2016 are notable. To my mind, they reinforce how useful it can be to try to think different in investing – and to buy the stuff nobody wants while it’s cheap. That way, you own it when everything is turned on its head and it’s back in fashion again.
Foolish Final Thought
We’re in it for the long haul here at the Motley Fool, and we focus on investing in great businesses for years rather than months. It’s over that kind of time horizon that we can make sensible judgments on how a business is likely to perform, and whether the price is right.