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Quotidian Investments Monthly Commentary – December 2015

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January 4, 2016

The major market indexes ended the month of November at much the same level as they had started it. For those who take just a passing interest and only occasionally look at the progress of stock-markets it might well have appeared to have been a benign month. Nothing could have been further from the truth.

In fact, those who monitor markets closely on a daily basis will have seen a much different picture. In the second week of the month we witnessed a recurrence of the brutal and dismal market conditions of August and September.

The proximate cause of this return to bedlam was the issuance of US employment numbers and associated data on 6th November. These figures showed a far, far more positive position than had been generally expected with unemployment falling to just 5% and coupled with improved levels of income.

Whilst all this was clearly good news, it raised market expectations of the long-heralded US interest rate rise now actually being implemented at the Federal Reserve meeting in December. In reality that should not be a problem but market-makers still seem to feel obliged to perform an initial knee-jerk negative reaction when interest rates rise.

As ever, the Federal Reserve will make its statement at the end of their next quarterly meeting on 17th December; just in time for the possibility of a traditional ‘Santa rally’. It is worth noting that in 25 of the last 31 years the equity markets have rallied in December and so it would not be a complete surprise if this were the case again. However, lingering doubts related to US interest rates and potential further terrorist activities may act as a dampener this year.

In fact, towards the end of November market attention became centered on the appalling terrorist outrages in Paris. In the past, equity markets have rapidly headed southwards in response to such reprehensible acts and market participants were braced for a major sell-off on the Monday following that previous Friday evening’s events.

From the forensic investigation that followed the 9/11 attack on the World Trade Centre in New York we became clearly aware that the terrorists had shorted the US stock-market in advance of their violent strike. The very substantial profits they thus made have since been used to finance further atrocities.

One of the few pieces of positive news to emerge from their latest acts of barbarism in Paris was that global markets did not sell-off sharply but responded in a calm and measured way and maintained their composure. As a result, an equity market rally this time caused the terrorist short-sellers to sustain substantial financial losses (which is both morally satisfying and about as much as capital markets are able to inflict in terms of retribution).

 

On 30th November the FTSE 100 closed at 6356 (which denotes a fall of -3.20% for 2015 to date). It also represents a fall of 0.08% during the month of November.

By comparison the Quotidian Fund at the end of November stood at +17.99% for the year to date, having been marked down in value by +0.76% in the month. We currently stand 21.19% ahead of our benchmark (being the FTSE100 index).

Markets all now await the Federal Reserve’s rate decision on 17th December. Currently there is a 70% chance of an increase in US rates at that meeting (which would be the first increase since 2006) but that upward move is only expected to be at the very modest level of 0.25%.   Signals from Janet Yellen (the Fed’s chairman) suggest that this will be followed by similarly minor increases over the next twelve to eighteen months entirely in harmony with economic progress in the USA. Present indications are that there is a ceiling of 2% in mind as the maximum target rate. We do not expect that to create a long term problem.

It is salutary to note that the major market indexes (and particularly those in the USA and the UK) now stand at roughly the same level as they did in November 2014. In light of that, Quotidian’s comparative performance illustrates the added value of active professional investment management as opposed to simply opting for market tracker funds or the ‘structured products’ on offer from the usual suspects. We have frequently described tracker funds as too often providing ‘return free risk’ and that assertion is clearly evidenced by this latest example.

As ever, though, we recognise that unmonitored stock-markets can rather sharply make one look very silly indeed and so will keep the sound of trumpets muted and focus on trying to maintain our positive progress through these uncertain times.

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