Why Tesla has quickly become the canary in the coalmine

Tesla is quickly becoming the canary in the coalmine when it comes to current euphoria around stocks, according to a CIO.

Despite concerns around earnings, the reopening of the economy and the failure of the U.S. government to pass a fiscal stimulus bill, few expected a month in which the S&P 500 saw only three negative days and a total monthly return of 7.2%.

Greg Taylor, of Purpose Investments, said the mania around certain stocks, such as electric car manufacturer Tesla, is bringing back memories and comparisons of 1999. “That was another market that saw an increase in retail investors chasing new themes and technologies,” he said. “No one knows how far this will run, but most of us remember how 1999 ended.

“The price action of both Tesla and Apple in August following a 5:1 stock split - Tesla up 74.2% and Apple up 21.7% - is a rare occurrence. But when it’s happening with the largest company in the world and another of the top 10 on the S&P 500, it’s hard to ignore and needs to be watched very closely.”

Many investors surprised at the market’s performance have taken profits and locked in gains, although Taylor conceded that maybe people are overthinking things and that perhaps “we should have just stuck with the understanding that there is no way equity markets won’t be at all-time highs on US election day”.

Another concern for investors should be the prospect of inflation. Taylor said the recent speech by Federal Reserve Chair Powell at the Jackson Hole meeting saw the admission of what many had expected for months, that the central bank is expecting to see inflation return to the market.

The term they are using for this is “inflation averaging”, meaning the Fed is preparing to stay dovish for a long time, with no rate hikes expected over the next few years. Usually, central bank would closely monitor inflation levels to gauge when they should reduce or end accommodative programs.

Taylor said: “This new concept admits to everyone they are prepared to let inflation run above target levels in the short term, looking instead at the average of inflation over a number of years. This is a big change of course for markets and investors.

“One of the winning trades for 2020 has been gold. The sector saw some profit taking in August after an amazing run to breach the US$2000/oz level in July. This should be looked at as a buying opportunity for the medium to long term.

“In periods of inflation, one of the greatest protection strategies is real assets. This could be a perfect environment for gold, silver and real estate for a number of years. As more money is printed to inflate away the debt, you may want to focus on assets that will hold their value through this environment.”