And the Nasdaq composite index, a stock market sweet spot over the past five years, fell by 6.4 per cent from its mid-month peak. So, yes, February ended on a nervous note in the financial markets.
The main culprit: rising long-term interest rates. This isn't always a bad thing, as higher long-term rates and in particular a steeper yield curve are classical harbingers of increasing economic growth. You may recall that a downward sloping yield curve, on the other hand, is generally interpreted as a recession call.
However, rising long-term rates also reduce the opportunity cost for investors in stock and other risk assets, meaning there might suddenly be a real alternative after all. And it may be interpreted as a sign of impending or brewing inflation. There is certainly a plausible economic explanation in the massive support measures launched in no time by governments all over the developed world. At some point, there might be too much money chasing an insufficiently elastic supply of goods.
Perhaps. Nerves were palpably calmer at our offices, or rather our respective home offices. Again, we don't invest in the securities markets, we invest in securities. You often hear the expression that you can't see the forest for the trees. Well, in this case, I'd venture that a lot of investors don't see the trees for the forest. There was and is no shortage of viable trees in this forest.
While government bonds fell in value, which is simply equivalent to saying that benchmark rates rose, the credit spread development was another story. In fact, spreads on both US and Euro high-yield bonds fell by 26-27 basis points in February. Managing several bond funds with quite a bit invested in high-yield corporate bonds, we found this month to be rather more tolerable.
What's more important, most of these bonds are floating rate notes, meaning that they are delightfully insensitive to changes in the interest rate level. So, you can see why we are not that concerned about our bond funds.
As for the stock market, rising long-term interest rates were a boon for value stocks. For several years now, steadily falling interest rates have sustained a disproportionate increase in the value of stocks with more of their earnings far into the future – i.e. typical growth stocks. With rising interest rates, fairly priced value stocks suddenly look more interesting again.
In terms of relative performance, February was actually the fifth best value month in the history of the MSCI value and growth indices, with a history going back to January 1975. Value stocks garner little attention and produce few headlines, though, especially when compared to stocks like Tesla – which, yes, fell by 15 per cent in February (spoiler alert: we don't own Tesla stock).
Meanwhile, we're culling our trees as best we can and enjoying some good relative returns.
Finn Øystein Bergh
Chief Economist & Strategist
Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager’s skill, the fund’s risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments. This is marketing communication.