Traders shift mind set as the Fed spooks the market

Anyone waking up in Europe will see that the sell-off in US stocks that started just as Europe closed for the day has accelerated. By the time US markets closed on Wednesday, the S&P 500 was down more than 2% and the Nasdaq had fallen by more than 3%. Since its peak in August, the S&P 500 is down more than 9% and the Nasdaq is down 12%, which is technically in correction territory. The biggest losers on the US market included Tesla, which was down a massive 10%, after CEO and founder Elon Musk delivered a hazy and somewhat contradictory message about making his electric cars competitive at Tesla’s “Battery Day” event. 

Musk muddies the waters for Tesla, yet again 

The market tends to react strongly to statements from Elon Musk, and combined with market nerves on the back of rising global coronavirus cases and lockdowns across Europe, the mood was not favourable for “pie in the sky” rambling from Musk. At this week’s “Battery week”, Musk promised a “million-mile battery”, he also said that he wants to half the price of battery manufacturing to make Telsa cars rival petrol and diesel cars on price.  The problem was that he didn’t give a detailed timeline or shed any light on the processes that will make this possible; instead he highlighted the problems with scaling up the manufacturing of affordable electric cars. 

Musk said he wanted to create a $25,000 Tesla in three years, but the market wasn’t impressed, in three years’ time rivals such as Volkswagen, which launched its own electric SUV on Wednesday that costs a fraction of what some Tesla’s cost, could provide significant competition to Tesla so they have no time to waste. Added to this, the delay in producing an affordable Tesla model comes as the world enters a deep recession. With 500 million people around the world without jobs because of Covid, there could be a drop in demand for luxury, high-priced electric vehicles, which could hit Tesla’s bottom line. 

Is value investing coming back into fashion?

This last point is interesting for the Nasdaq, with some companies trading at many multiples of future earnings, Tesla’s P/E ratio is more than 500 times future earnings, Amazon’s P/E ratio is nearly 100 times future earnings, the market could be tiring of stocks that are richly priced, hence the 10% and 4% falls for Tesla and Amazon respectively on Wednesday.  While we still think that both companies are extremely important for the global economy going forward, this could be a sign that traders are no longer looking at growth stocks only, and they may start to show some interest in value stocks. Energy and mining stocks, which have seen their share prices fall for most of this year, were the top performers in the US markets today, and in the UK healthcare stocks outperformed. If this trend continues then we may see stocks with low P/E ratios and a decent valuation outperform the growth stocks with huge P/E ratios, this may also trigger a preference for European stocks over US stocks. Thus, it is important to see if European markets fall as steeply as their US counterparts as we move into the latter part of this week. 

Central banks provide no soothing balm for battered US stocks 

Elsewhere, central banks are also stoking the risk-off tone in markets this week, after both the Bank of England and the Federal Reserve backed away from further policy action. The Bank of England governor said that negative rates are not likely to be implemented any time soon, however, the risk off tone and surge in the dollar this week meant that the pound could not take advantage of BOE Governor Bailey’s slightly less dovish tone when he testified before the Treasury Select Committee earlier this week.  GBP/USD is at its lowest level since July, and any attempts at recovery are being rebuffed for now. This pair is currently testing a critical support zone at $1.2725, below here opens the way for a move back to $1.2550 in the next few days. With the UK’s economy starting to show signs of strain and a growing sense that a national lockdown is coming for the UK, it’s hard to muster up much enthusiasm for the pound right now. However, be aware that on Thursday the UK’s Chancellor is expected to announce another round of support for workers and businesses, although the furlough scheme is expected to be ditched next month as expected. The Chancellor is seen as reliable and good in a crisis, thus if he delivers a sensible and powerful package of measures that could boost the economy during a potential second period of lockdown then the pound may try to rally in the short term. 

The Fed’s despair with the US Congress 

BOE Governor Bailey should count himself lucky that he has such a responsive Chancellor, in the US, the Federal Reserve is shouting from the rooftops asking for more fiscal support to protect the US economy from the ravages of a second wave of the virus. This has worried the markets because another stimulus package is unlikely before January, once the election is out of the way and the new President is, hopefully, installed at the White House. Although the chair of the Federal Reserve, Jerome Powell, said that the Fed would do whatever it takes, for as long as it takes to protect the US economy from the effects of Covid, the fact that other Fed members, including the vice-chairman, have been calling for more stimulus measures, suggests that the Fed’s work alone may not be enough to help prop up the US economy in the coming months. Thus, if the market is looking for good value stocks, a government that is pledging money to help foster an economic recovery and the threat of negative interest rates eating away at the value of the pound, then this should be a recipe for success for UK stocks and the FTSE 100, especially from overseas investors. Of course, nothing is that simple, and we would expect the FTSE 100 and other European stocks to sell off in solidarity with the US on Thursday. However, the UK could see some much-needed interest come back into the stock market if traders’ focus on value over growth develops into a long-lasting trend.