This morning you might have woken up to these headlines: “Carnage in tech stocks” and “S&P turns negative for 2025”. With the Magnificent Seven having merely fallen 3%, the sub-eds are certainly going to run out of adjectives when the bubble truly bursts and losses exceed 50%. Of course we don’t know when that might occur, no one does. We simply need to understand the vulnerability, and the scale of losses which we should expect, guided by some solid precedents.
Two other worthies added their two penneth in recent days. Paul Singer, founder and CEO of Elliott Management, and a very active investor since the 1970s, said:
“The state of stock markets today are just about as risky as I have ever seen… Leverage is building and building… It’s crazy.”
Comments from Federal Reserve Governor Lisa Cook were more measured, but the message is clear:
“Valuations are elevated… markets may be priced for perfection and therefore susceptible to sharp declines.”
Take care. There is a stop-loss recap at the end of this note.
To yesterday, the Hang Seng (Hong Kong, or H shares) were up 5% over the week, in contrast to the tech-centric NASDAQ index, down 5%. H shares are the target of international investors who are warming to the drip drip of positive news out of China. This week it was news on recapitalisation of the biggest banks.
In contrast, the US headed lower again. The Nvidia results apparently disappointed (though the headline numbers were damn impressive), and Trump persists in sowing seeds of uncertainty, on tariffs and beyond.
The picture is similar over the last month, as you can see in the latest “What’s Hot? What’s Not?” feature. The average fund in the China sector is up 10%, and the average US fund is down 4.3% (8% in the case of US smallers). The Indian sector is also down 8% over the month.
Five of the top 10 funds are Chinese, four exceeding 10% gains. Two are European funds, on which see more below. Six of the dud funds are US, mostly smaller companies. Three of the other funds are invested in India, which has continued to drift lower.
That 4.3% average loss in the North American sector hides some notable differences between the best and worst. Interestingly, the best over one month is a classic Value/equity income fund, Aviva US Equity Income. At the bottom of the pile is Fisher US Small and Mid-Cap, down 8%.
Though the US and Trump in particular have dominated headlines, one very interesting development in the last week was not only the German election result and the arrival of the new Chancellor, Frendrich Merz, but the reaction of the German stock market. Much of what has occurred is counter-intuitive and certainly wouldn’t have been predicted a small number of months ago, not with Germany in a deep economic crisis, and the election of a pro-growth President in the US. The Dax 40, comprising the biggest German businesses, has outperformed the S&P 500 by a substantial 18% from Trump’s election day, with the S&P dead in the water.
There are two high level reasons for optimism: the assumption that a Trump-triggered revival in German military spending could revive their moribund industrial heartland, plus the hope (likelihood?) that the cap on German government debt, the “debt brake”, could be adjusted. That and other bold reforms (e.g. deregulation, lowering company tax, rebuilding crumbling infrastructure) would be a considerable boom to the German economy.
While a centrist Government is not exactly flavour of the year (whether in Germany, France, the UK or elsewhere), the new German and UK governments have four years to show that political parties at the centre are not yet dead and buried, and can turn their hand to fundamental, desperately needed, reform.
The German market is strikingly cheap relative to the US, and a reform-minded German government could unlock years of outperformance versus the US stock market.
But don’t get too carried away. Germany’s biggest export market is no longer China, it is the US. This leaves them exposed to Trump, creating considerable uncertainty, and, as we all know, markets hate uncertainty.
Nonetheless, if you are warming to mainstream European funds, and accepting that German politics and/or Trump may yet upset the apple cart, do go to the Best Funds By Sector tool on FundExpert and select “Europe Excluding UK” – the Artemis fund appears to have the best momentum over 3 and 6 months.
Turning to smaller companies, they are perpetually intriguing. US smaller companies have disappointed since the US election, down nearly 10%, versus the large caps which are unchanged. Small caps, more than any other part of the stock market, requires confidence. Liquidity is not so good, which puts off large buyers unless and until confidence in the domestic economy is entrenched, valuations are cheap, interest rates and inflation are steady, and, ideally, a reform-minded government is determined to unlock the value in these domestically focussed stocks.
The problem for US smallers has been evident since 2015, highlighted by recent research from Robeco. Earnings have grown more than their larger brethren, but the large caps in the S&P 500 have gone up nearly twice as much as smallers since 2015.
It has been even worse for European smaller companies. They grew their earnings even more than those in the US, but have underperformed their US counterparts by 60% since 2015. European (including UK) smaller companies, continue to feel like a longer-term opportunity relative to the large caps. But in the short term there is still no sign of them beginning to outperform the large caps, and you can only confidently make this asset allocation switch once that is evident.
Turning to gold, last year when we highlighted this opportunity, when there was net selling of gold ETFs, we said that you will know when this trend is mature because you will see it in the headlines and money will rush to buy. This has undoubtedly been the case since the New Year, and in the last week the main gold ETF (GLD) has seen the biggest inflows in history, easily beating the prior record set in early 2020 as the pandemic loomed large.
It would be very surprising if one week of out-size buying was the end of the gold bull run, and this retail buying is very recent. Gold is a very emotional investment, and emotions are running even higher than usual at the moment, aided by daily doses of Trump diatribes. Certainly expect volatility, particularly if you are in gold miners, and even an extended pause over weeks. But it is too early to call for a terminal peak in gold.
Last but not least, falls are occurring which are challenging or exceeding 10%, the level at which we typically place a stop-loss. As I have said before, are you using our stop-loss tool? If not, why not?
As covered off in a number of our old teleconferences, having set the stop-loss, do keep moving it up as your fund moves up in value e.g. if the fund is up 20%, your stop-loss should be set at 10% below this new level. If you are up 40%, you might also apply a smaller stop-loss, say 5%, so that if you apply the stop you still retain a substantial gain.
Using our stop-loss tool and updating it accordingly means that we keep your eye on the ball. We alert you when the stop is hit. Emotionally, applying a stop-loss is not easy. But it’s a lot less painful than sitting on losses of 50%-plus and waiting years for a recovery e.g. from the 2000 tech peak, it took 16 years for tech funds to regain prior highs, with 80% falls in the interim.
This from the 15th November note:
“To be clear, a stop-loss is not a timing tool. Rather it ensures that you sidestep the possibility of devastating falls in your portfolio, particularly those which might become entrenched for years. Do read and re-read "Stop-losses and Momentun Don't Work". Let's Look At The Evidence. The point is not to get complacent about stock market returns. They won’t be delivered to you in a nice neat package with a ribbon, which happens to coincide with the timing of your life plans.”
Have a great weekend.