A series of unexpected events

The information in this article is market commentary only and reflects Lincoln's views and beliefs at the time of preparation, which are subject to change without notice. To obtain up-to-date information, please contact us.

For those ‘all weather’ investors who couldn’t help taking a moment from festivities and share the occasional glance at the market, you would have noticed some peculiar behaviour in January.

It started on the morning of 3rd January (evening of the 2nd in the US).  After market close one of the world’s leading brands and at the time the 2nd largest company on the US Stock Exchange, Apple Inc, released a letter to the market telling investors that because of weak iPhone sales to China it was forced to cut revenue expectations by some 7.5% for the first quarter. In after-hours trade the stock fell over 7%, and many Australian woke up fearing our market would suffer a decline in anticipation of what would happen when Apple shares resumed trading the following day.

But something peculiar happened… the All Ords on the 3rd January opened higher and closed in the green up some 1.2%.

That evening when the US Market resumed the Nasdaq fell 3% with Apple leading the way down 10%, and our market subsequently followed suit on the 4th January, though not by as much.

This was not the end of the strange global market behaviour which saw a chain of events resulting in unexpected outcomes.

  • On the 3rd January, a currency growing in its ‘safe-haven’ status, the Japanese Yen experienced a sharp sell-off for no clear reason. The currency in intra-day trade fell a huge 4% but then rebounded throughout the day with no explanation given for the traditionally placid currency’s big moves.
  • On the 4th January, after markets had digested Apple’s update, the world’s largest smartphone manufacturer Samsung delivered earnings guidance for the 4th quarter saying that was almost 20% below analysts’ expectations. Rival Korean electronics firm LG warned investors of an 80% fall in profits for the quarter. Despite these disappointing updates, their respective prices remained stable and European markets shrugged off these concerns and rose on the open.
  • On 7th January Australian New Vehicle sales data showed a 3% decline for the year. Often considered by many economists as a leading economic indicator, reflecting the strength of business and consumer confidence, what was of great concern was that in December when compared against the corresponding period a year earlier, sales were down 14.9% for the month. The market rose on the day.
  • On the 8th January the European Union’s largest economy Germany revealed that the manufacturing sector suffered its worst year-on-year contraction since the financial crisis in November, stoking fears it could be heading for recession. The German DAX closed up 0.5% that day.
  • Throughout January pressure has been growing on the British Government to arrive at a compromise over the terms of Brexit. However, as expected, the Brexit deal failed to pass parliament with the defeat the largest for a sitting government in UK political history and only the fourth time a vote has been lost by a count greater than 100. To date, the FTSE in January has risen 2.48%, and in the hours after the announcement, despite the economic uncertainty, the Pound rose.

Making sense of the nonsensical

What these examples highlight to investors is that the idea that every movement in the market can be explained is an untruth. We read the headlines, listen to the reports and watch the opinions of market experts as they espouse with a high degree of certainty why the market went up or down. Whereas the only definitive and accurate reason for a market move is that more investors/traders wanted to buy/sell than those looking to do the opposite.

Whether it was lighter volumes over the Christmas period playing havoc with the high frequency and algorithmic computer-driven systems, the US Dollar strengthening, oil prices retreating, or just good old-fashioned optimism, to date, the market in 2019 has ignored the negative macro picture and gone up.

So now the market is at a two-month high with the December sell-off recouped we look forward as surely with all this negative talk it can only go up from here?

But the reality is the market in 2019 will do what it has always done. It will deliver opportunities and the occasional heartbreak. It will not be predictable, nor can we control it. So, our time as investors is best spent on blocking out the noise and focussing on the things, we can control whether it’s our asset allocation to shares, understanding our tolerance to risk or adhering to a bottom-up investment strategy that keeps us focused on quality and fundamentally healthy businesses at all times.

Source:  Lincoln Indicators



Elio D’Amato is the Executive Director at Lincoln indicators, a fund manager and creator of Stock Doctor share market research platform.  www.lincolnindicators.com.au