It has long held true that information is power. There is an apocryphal story that much of the wealth of the Rothschild dynasty can be traced to the Battle of Waterloo. Back in 1815 it was safe to assume that no one was ‘live-streaming’ the day, nor was there radio coverage, nor even updates on Teletext (nor Ceefax, if one happened to prefer the BBC). The result of the enormous ding-dong was relayed via messengers on horses, then by ship and ultimately horses again. The Rothschilds, by all accounts, were rather better than everyone else at the whole shebang and thus knew before anyone else that Waterloo was won.
Back in those days of yore, this counted as being fundamental research rather than inside information. The Rothschilds were thus first to the stock market with the rather price-sensitive news of Wellington’s win. Those familiar with the tale will know that this is the bit where it gets clever. The reasonable assumption would be that the stock market would roar ahead on the news and that the Rothschilds’ brokers would buy all the stocks they could lay their hands on. Au contraire, as the defeated Napoleon may have said. They sold. Their gamble was that it would be some time before anyone else knew the result, and that everyone would second guess, wrongly, that their selling meant they knew the battle was lost. Nowadays, would that be market manipulation? It is a fine line. Nonetheless, the stock market crashed and the Rothschilds duly filled their boots with shares at rock bottom prices.
Or so the story goes. Whether it is true or not matters little, it is a classic illustration of both the power of knowledge and the need to use this the right way. Stock markets, or (strictly speaking) investors, have an insatiable lust for knowledge. If, so the theory goes, one has information a millisecond before everyone else, then one’s all singing, all Strictly-Come-Dancing supercomputer can place trades before the rest of the market.
It is a tried and trusted tactic for many. Actually that is not quite true, as I do not know how trusted it really is. Knowledge can also be very dangerous. Let us nip back to the US presidential election in 2016. The one that Donald Trump won, despite receiving roughly three million votes fewer than the equally unappealing Mrs Clinton. But I digress. There was unanimity amongst the cognoscenti that a Trump win would be nigh on disastrous for the markets. Very few worried about this, though, as precious few thought that he could actually win. Those who did predict his win, however, are believed to have sold. They shorted the market.
Let us now skip to the early edition of the Washington Post on November 9th, the morning after the election. The headline is “Markets plunge worldwide as Trump surges to the White House”. The second paragraph reminds us that “Futures trading was temporarily halted for the Standard & Poor’s stock index amid a 5 percent loss.” So far, all is according to plan. But if we move later in the day, Forbes tells us “Stock Market Slingshots Higher After Trump Victory”. Then we have “The Dow climbed 256 points…and closed inches away from its record closing price.” The US market of course rose around 20% over the next year.
Last week the European Central Bank raised its interest rates, yet again, by another 0.25%. On Wednesday and Thursday this week, the Federal Reserve and Bank of England decide if they feel the need to follow suit. How will the markets react if they do, or if they don’t? It is a game for mugs, cups and saucers. What we do know is the markets expect the peak of rates to be either where we stand (sit) today, or where we shall be on Thursday afternoon. This week is peak week, be it at the current rate of interest, of 0.25% higher. And peak week, surely, has to be a good thing.
Finally, well done to those who knew last week’s Slade classic ‘Come On Feel The Noize’. Today, something equally raucous: “Everybody needs a shot of R’n’B, so come on down to my surgery.” Steely Dan-wise, after last week’s couplet from ‘Any Major Dude’, today’s teaser is “The man in the street, dragging his feet, don’t want to hear the bad news.”
Jim Wood-Smith – Market Commentator and Head of Climate Transition
FPC 1247
All charts and data sourced from FactSet
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