As stocks stumble and cryptocurrency markets reel from a steep $400 billion correction, JPMorgan analysts warned in a Monday morning research note that other risky pockets in the broader market, including buzzy special purpose-acquisition companies and clean-energy stocks, are starting to approach bear market territory, unraveling the massive gains priced in under the longest bull market in history as investors worry about problematic inflation ahead.
Though global stocks are only down 2.5% from their peaks in April and May, some stock indexes—including the tech-heavy Nasdaq—are down about twice as much in a telltale sign that “markets are expensive and inflation is running hot” enough to doubt the central bank policy that’s been supporting economic growth, JPMorgan analysts wrote in a Monday note.
Headlining the stark reversal of fortunes, the value of the world’s cryptocurrencies—after roughly tripling this year—has crashed nearly 18% from a Wednesday high due in large part to a slew of negative tweets from billionaire Elon Musk, a vocal cryptosupporter who’s recently soured on the world’s largest cryptocurrency.
Meanwhile, clean energy stocks, which tripled last year in anticipation of sweeping progressive climate legislation, have fallen more than 35% since January as the broader tech sector slips and inflation hikes up the prices of the commodities necessary to manufacture products in the field.
Blockbuster public-market debuts have been a hallmark of the pandemic stock market—with new listings from Airbnb, Coinbase, DoorDash and more—but after soaring more than 100% in a year to a peak in February, newly listed U.S. stocks are down 26%, according to the Renaissance IPO ETF.
It gets even worse for SPACs (themselves a frothy market indicator) and the companies they’ve taken public, which have plummeted an average of nearly 38% from a February high, according to the first-ever SPAC ETF.
That big drop is in line with the 34% plunge the ARK Innovation ETF—a fund invested in “disruptive” tech and whose biggest holding is Tesla—has witnessed since February.
Crucial Quote
“All of these moves are consistent with a chain reaction that occurs when markets are expensive . . . but the ecosystem connecting the economy, markets and the [Federal Reserve] isn’t a nuclear power plant destined for meltdown,” JPMorgan analysts led by John Normand wrote Monday, pointing out that past market cycles have shown about 80% of “seemingly expensive asset classes” that crash in one business cycle end up returning to previous highs in the next cycle.
Key Background
Analysts agree that the Federal Reserve’s unprecedented pandemic stimulus efforts have helped lift stocks and other assets to meteoric new price highs. However, concerns that pent-up demand and an economy awash with cash could spark problematic inflation and force the Fed to rethink its policy are now starting to rock the market. Stocks posted their worst week in three months last week, and at the same time, other assets have become increasingly sensitive to unpredictable shocks—most notably in the crypto market’s volatile reactions to Musk’s hot-and-cold tweets.
What To Watch For
“An inflation-induced stock market correction is possible, but an inflation-fueled shift in market leadership is more likely,” analysts at wealth advisory Glenmede wrote in a Monday note to clients, echoing commentary from other experts predicting that value stocks in recently hard-hit sectors like energy and financials will lead the market this year, as opposed to longtime market leaders in technology.
Tangent
Noteworthy investments to protect against inflation include energy stocks, gold and Treasury bonds indexed to inflation (also known as TIPS).
I’m a reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism and economics while working for UNC’s Kenan-Flagler Business School as a marketing and communications assistant. Before Forbes, I spent a summer reporting on the L.A. private sector for Los Angeles Business Journal and wrote about publicly traded North Carolina companies for NC Business News Wire. Reach out at jponciano@forbes.com.
De la Vega, Joseph: Confusión de confusiones (1688): Portions Descriptive of the Amsterdam Stock Exchange. Selected and translated by Hermann Kellenbenz. (Cambridge, MA: Baker Library, Harvard Graduate School of Business Administration, 1957)
Stringham, Edward Peter; Curott, Nicholas A. (2015), ‘On the Origins of Stock Markets,’ [Chapter 14, Part IV: Institutions and Organizations]; in The Oxford Handbook of Austrian Economics, edited by Peter J. Boettke and Christopher J. Coyne. (Oxford University Press, 2015, ISBN978-0199811762), pp. 324–344
Macaulay, Catherine R. (2015). “Capitalism’s renaissance? The potential of repositioning the financial ‘meta-economy'”. (Futures, Volume 68, April 2015, p. 5–18)
By now we are all keenly aware of the near-devastating impact that the novel coronavirus has had on oil markets and the fossil fuel industry around the world. (If this is news to you, what rock do you live under and is there room for one more?) But while a lot of the narrative here in the West has been about the historic oil price crash in what some are now referring to as Black April, the oil trading catastrophe actually started much earlier and can largely be traced back to the bad bet of just one man, Singapore’s commodities tycoon Lim Oon Kuin.
The story of the oil market instability that ripped through Asia starting in China is not so much one of struggling oil companies, but a story of banking – that unsexy, behind-the-scenes sector that all too often gets none of the headlines and all of the control. It started way back in January, when most of us were just starting to gain some awareness of a strange and scary illness devastating the Chinese city of Wuhan.
Lim Oon Kuin, sitting in his office 2,000 miles away in SIngapore, watched as this news unfolded and made a decision. He decided that China would gain control of this epidemic before it turned into a pandemic and began stockpiling fuel, quietly adding to his already vast reserves. It should come as no surprise that that bet didn’t work out.
As the coronavirus spread around the world and tanked global crude demand, as well as oil prices, a chain reaction of defaulted loans, was set off in Singapore that is still reverberating in global markets today.
“Banks tried to recover loans from Lim’s company, Hin Leong Trading Pte, triggering one of the biggest scandals in the oil industry this century,” Bloomberg reported about the bad deal that has left a permanent mark on oil trading.
“Lim’s empire collapsed, owing $3.5 billion to 23 banks, and the fallout from the debacle is still reverberating into 2021, shaking out large tracts of the vast and often opaque $4 trillion global oil-trading industry.”
While this may sound like an outright, unmitigated disaster, as with most financial meltdowns, there are winners as well as losers here.
The losers, as always, are the little guys:
“hundreds of small trading firms, many of them employing only a handful of people, who will find it expensive, if not impossible, to meet the increased demands for information from banks that have become wary of lending them money.”
This is to say that the big guys like Trafigura Group and Vitol SA will be gaining business lost by their small competitors, shoring up their oligopoly on trading. They not only benefit from increased confidence from finance companies who have become increasingly risk averse in this environment, they also have the capital to adapt to increased operational costs.
And, as usual, less developed countries will bear the brunt of the economic fallout from this sea change. As banks become more risk averse, re-prioritize their business models, and scale down, it’s going to impact small companies in small economies the most just while they are struggling with all of the other economic hardships related to this pandemic. In this case, the big banks truly were too big to fail. The same can’t be said for the little guys.
This is true, of course, for many market sectors, not just commodities trading. Across the world we’re seeing a sweeping consolidation as big companies are able to weather the financial storm of the COVID-19 pandemic and the little ones are folding. Look no further than the main street of your own town: as mom and pop restaurants struggle to make a sale, lines are down the block at the McDonald’s drive thru. As local shops shut down, Amazon becomes ever more of the globalized goliath it already was.
More than anything, however, the story of Lim Oon Kuin and his bad oil bet is an object lesson in the butterfly effect and outsized might of the all-too opaque trading sector. His will never be a household name, but the impact of his oil gamble will continue to be felt around the world for years to come.
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Market analysts regularly send commentary to journalists who regularly write about finance and economics. And while there is some divergence of opining, frequently you can find common patterns in many of the emails.
Recently, there has been a deluge of analyst comments bouncing off the walls of the email inbox. Many were saying on Wednesday morning that markets were souring because the election was up in the air. Except that wasn’t the case. Major indexes went up.
As I said, it’s about the election, but it really isn’t. This could have been anything. A tremor in trade relations between two major world powers. Unexpected drops in crude oil pricing. The election is nothing more in this case than an object lesson in the limitations of what the market experts can tell you. Recommended For You
To markets, perceived or even potential uncertainty is unsatisfactory. Those placing investment bets want as much information about the chance of success or failure as possible. As equities are focused on future results, the calculus becomes more complicated than that facing a first-year university engineering student trying to determine the volume of a doughnut.
But the delayed nature of this election is nothing historically, when you consider the 1876 contest that stretched into the Compromise of 1877, otherwise known as the Great Betrayal by millions of Blacks in the South. Or every single election, as the Electoral College members meet in mid-December to cast the actual ballots and even those are subject to count and possible challenge by Congress early in January.
Despite all the political and financial media, pundit, and expert nail biting, markets have been quite happy over the last few days. According to data from S&P Capital IQ, the S&P 500 index was up 1.8% between Monday and Tuesday and then 2.2% from Tuesday to Wednesday. For the Dow Jones Industrial Average, the changes were 2.1% and 1.3%. Nasdaq NDAQ+3% saw 1.9% and 3.9%. The Russell 2000 small cap index jumped 2.9% by Tuesday and was flat on Wednesday.
This looks like a positive reaction. It shows nothing suggesting that markets are worried. Maybe the analysts saw early suggestions in index futures, which were fluctuating. Who knows, they might have written their commentary the previous night.
Then there were the explanations of what’s been happening since it became obvious that markets were comfortable. Tech stocks were doing well because a divided Congress would make it unlikely that they’d face a breakup or interference, although that isn’t clear. Republican and Democratic elected officials have made their anger at the major tech platform companies clear and have moved back and forth over issues of privacy and censorship. To assume that a Google GOOG+0.8% or Facebook would be safe from any action (which could be newly undertaken or continued by a Department of Justice lawsuit) is unrealistic.
Next came assumptions that the response was all about pandemic stimulus, which at least had some basis in fact. Loose monetary practice and fiscal stimulus have skyrocketed during the pandemic. Mountains of money entered the economy and, with interest rates ensuring low yields on bonds, investors want a return, which has meant stocks. But no one has a clue as to when a stimulus might happen or its size.
Analysts know all this variability, but they can’t account for it on a minute-to-minute basis. There are debates among academics and experts over whether the stock market acts like a random walk—a series of coin flips. Some say that over the long run, there are patterns and the market can be predictable to a degree. Others disagree.
In either case—pure random movement with overall economic forces pushing prices up over time or something with patterns—stocks go somewhere over the long haul. They also do on the short haul although, collectively, with far less precision. Indexes go up and down and large percentages of the stocks represented in them do the opposite.
This is why it’s so hard to beat the markets. You’ll likely never know which ones in particular might do well over a given time frame, and you can’t necessarily predict the macroeconomic forces that will shape the track down which they all race.
But the experts and pundits and reporters and politicians all feel the pressure to explain every bump in that road. Human beings have a natural tendency to look for narratives that offer, in retrospect, the story of why things happened. The expected understanding of all things investing, whether realistic or not, is why they’re paid.
Call a broker and ask what happened today, and that person needs to sound informed. The market reporter speaking with a television anchor wants to sound knowledgeable. The pundit is expected to point a finger in the right direction. But so much of what happens is mass psychology and beyond rational description.
Some people are truly canny and have a better sense of the flow. They still all get caught out often. When they do, there’s a scramble to find a solid ground. Chalk it up to human nature.
So, take all of what you hear with a grain of salt. There are no obvious answers, and the explanations might be right or wrong. Instead, focus on the longer run. That’s where the money’s to be made and the bumps and jags fade into a smoother pattern. Follow me on Twitter or LinkedIn. Check out my website.
I’m a freelance journalist and writer with credits in Fortune, the Wall Street Journal, the New York Times Magazine, Newsweek, NBC News, CBS Moneywatch, Technology Review, The Fiscal Times, Inc, and Vice. I also do ghost and corporate writing. You can see my portfolio at http://www.linkedin.com/in/eriksherman and find me on Twitter at @eriksherman.
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This is the second in an exclusive series of articles fromTotal AlignmentauthorsRiaz Khadem and Linda Khadem titled “The Alignment Factor.” Check back in every Thursday for new installments.
Businesses small and large are being impacted by the pandemic, and entrepreneurs are not immune. In order to survive and prosper during these difficult times, it might be necessary to reinvest in your business concept and redesign your offerings.
As a successful entrepreneur, you have been aligned with your market, but are you still aligned? Do your customers need the same things as before, with the same mode of delivery? For example, imagine a previously successful restaurant that has lost its customers during the pandemic. Does the owner truly understand the current needs of his customers beyond the menu it used to offer or the ambiance it had created before?
In a nutshell, it’s grouping heterogenous people into homogeneous groups, or segments, by some criteria related to their needs. By defining a segment and focusing on the needs of that segment, and aligning products or services with those needs, you have taken steps toward market alignment. The key characteristics of a market segment could be similar customer needs or preferences. In a company with multiple locations, a segment will likely account for geography, demography and choices people make, the type of services they value and the quality they expect. In a smaller company, it could be a subset of these criteria.
Let’s look again at restaurants. Assuming the wearing of masks is a pretty universal requirement, the first pressing issue for owners is how to proceed over the next few months. Should the restaurant continue to offer inside dining? If so, how do you protect the customers? Usually, this is met by distancing the tables farther apart, requiring the servers to wear masks and hopefully the kitchen staff to wear masks and gloves. But what about the substantial number of people who now want to-go meals? Should they be forced to walk into a restaurant where people are eating (obviously without masks) to pick up the food? Or, more conveniently, can the restaurant offer to bring the food to the car? What about payment? Does the customer need to enter the dining room and present his credit card? Or can they pay over the phone or on the website when ordering?
These issues are not unsolvable, yet many restaurants seem unable to adapt. Perhaps it is a rigidity in the way the owners see their establishments and an unwillingness to re-evaluate the new needs of the market segment they were serving. It’s crucial to re-evaluate your customers and perhaps re-segment your market in line with the new reality. Otherwise, precious resources can be wasted on activities that are no longer in alignment. Flexibility and creativity at this juncture can mean the difference between success and failure.
What Is Differentiation?
After re-defining your market segments, you will have to identify what is important to customers in a segment likely to buy your product. Value drivers could be cost, quality, features, safety, buying experience, after-sale support, etc. In a restaurant, they could include the cost of items on the menu, the quality of the food (e.g. organic or not; using meat and poultry and sea food from sources that care for the animals well in a healthy environment), the variety in the menu, safety in the process of acquiring the food and eating, the restaurant experience and treatment received after the service is completed.
For each segment, evaluate the importance to the customers of each appropriatevalue driver on a scale of low to medium to high. For example, quality might be high for a segment while cost is a medium. Safety could be high, and follow-up support could be low. The evaluation should be based on data, not just opinion. You may need to use customer surveys to hear the voice of the customer.
Next, evaluate the same value drivers in terms of how your offering is different from your competitors. For example, is the quality you offer significantly better than your competitors? Is the cost you offer substantially lower than your competitors? Are the features you offer unique to you and unavailable to the customer from other suppliers? As you evaluate your value drivers, you can assign a low, medium or high rating to each. For example, if your value driver is features, and you offer unique features no one else is providing, your differentiation would be high. If everyone offers the same features, then your differentiation is low. Again, the evaluation should be based on data.
After evaluating your differentiation on each of the value drivers, you have a set of two evaluations for each one: The first is how important the value driver is to the customer in a segment, and the second is the differentiation of that value driver from your competitors. You can plot the two evaluations on a two-dimensional grid, the scale being low, medium and high on both axes
The value drivers that fall in the (High:High) category should become your primary focus, both in terms of the message you send to the customers in that segment and in terms of making absolutely sure that those value drivers are perceived by your customers as you promised — or even better. For example, if quality and safety have been evaluated as (High:High), your resources should be directed toward making sure your customers are aware of your differentiation and that your quality and safety are, in fact, at the highest possible levels.
Strategies for Each Segment
Your market segments don’t all deserves the same attention. You could close out some segments and put your investment into others, especially during these challenging times. As entrepreneurs, you will have a preference based on emotional attachments. This is dangerous, as your pet offering might not be appropriate for all segments. Having re-segmented your market during this pandemic, you are in a position to decide where to put your energies and investment. You will have to choose the segments to grow, those that could stay at the same level of growth and those you should exit.
How do you make such decisions? There are guides in the management literature to help you do this. Essentially, for each segment, you perform a two-fold evaluation: How strong is your segment compared to your strongest competitor in terms of the internal processes that deliver value to the customer? And how attractive is the segment to an investor?
If you are much stronger than your strongest competitor, then your strength in that segment would be high. If you are at the same level as your strongest competitor, your strength would be medium, and if you are weaker than your strongest competitor, your evaluation in that segment would be low.
As for market attractiveness, you will have to evaluate whether the market in a segment is extremely favorable, (considering a set of external criteria) or not. The external criteria could include the size of the market, the growth of the market and the profitability of the market. If the market segment is favorable, then the evaluation for that segment would be high. Otherwise, it could be medium or low. The value of this exercise is that it will enable you to see the relative position of your different segments compared to each other.
The segment with high strength and high market attractiveness (High:High) is the one that deserves your attention the most, and the segment that has low strength and low attractiveness (Low:Low) can be divested unless it provides input into an attractive segment. Other segments will require appropriate strategies based on their evaluation.
The strategic mindset we are proposing in this article will help you arrive at a set of strategies appropriate to each of your market segments. To develop a strategy, you need to have identified your market segments, differentiation and the relative position of your segments on the business strength/market attractiveness continuum.
Choosing where to put your time and investment will be key to your survival and growth, enabling you to make sound decisions and use your precious financial and human resources to deliver maximum value to your customers.
The recovery from COVID-19 in manufacturing will not be one uniform push. Rather, just as the virus worked its way across the globe, the recovery will be uneven as disparate regions and sectors move toward the next normal.
This won’t make things easy for manufacturers. But the one advantage of a staggered recovery is that it allows you to draw on the insights of regions and sectors that are ahead of you in the cycle. And based on several podcasts I recently recorded with colleagues who advise on manufacturing across the globe, everyone seems to be facing the same key challenges.
Supply and demand
No doubt the biggest disruption that manufacturers have experienced in this crisis are interruptions to their supply chain. When China closed down early on in the pandemic, there was a short spell where manufacturing around the world continued as usual. But then the last container ship left China—and that was that. Manufacturers knew just when supplies would run out. And if you are manufacturing a car, even just one missing part means no car.
So what’s the lesson manufacturers can learn here? That supply chains going forward must be more agile and resilient. Manufacturers now and in the future must have the flexibility to adjust their supply chains in terms of geography, sourcing, and complexity when a crisis hits. This means cost may no longer be the most critical factor when it comes to supply chains. Keeping costs down has its advantages—but not when it means closing a factory down due to a lack of parts.
Being flexible also means having the ability to retrofit production to accommodate changing market demands. The ability to simplify and reduce their product range and cut down on the complexity around the production process was what allowed many manufacturers to keep operating in this crisis. This is especially important given that demand for certain products practically dried up during the early stages of the pandemic while demand for others soared. No one knows when demand as we knew it will bounce back—especially with many economies now in recession.
Health & safety
The well-being of workers is top of mind for all manufacturers right now. While the shift to remote work was highly challenging, figuring out how to keep workers safe who could not work remotely was even more so.
Manufacturers have worked hard to provide PPE for employees who remained on the factory floor. But some manufacturers are being more creative about worker health, coming together to privately fund consortiums that provide a range of health needs, including regular testing. Others have reworked their floor layouts to increase distance between workers. And as more workers return, temperature checks and other personal health safeguards are being deployed.
Digital
Digital will be connected to every aspect of the recovery from COVID-19, from worker safety to reorganizing supply chains. As such, any digital plans and investments in the works pre-pandemic will undoubtedly need to be sped up. And manufacturers who haven’t embarked on the smart factory journey or invested in the connectivity to make it happen will need to start playing catch up.
But digital is playing an important role in the here and now. Digital has not only enabled remote work, but also the work that has had to stay within a factory. Using technologies such as apps and wearables, employees can be warned if they are straying too close to other workers. Advanced tools for taking temperatures are also helping employers monitor health and keep their staff safe.
Digital technologies—AI, IoT, analytics—are also critical in the near term. With the trajectory of the virus still unknown, businesses will need to rely heavily on forecasting and scenario planning to inform their business strategies. The more data they can gather and analyze, the more complete the picture will be. These technologies can also help manufacturers illuminate supply chains and address complexity.
Workplace
It’s becoming abundantly clear that the workplace will be a much different place post-pandemic. Even as the virus comes under control, it won’t be business as usual. With virtual work now an accepted—or at least expected—mode of working, leaders will need to rethink their workplace strategies. And the changing and uncertain environment will require new skills and roles—especially as the need for forecasting and scenario planning increases.
As operations begin to ramp up, manufacturers need to think about some key questions sooner rather than later. How do you get virtual teams to work together effectively and productively? How does remote work impact your talent and HR policies? How will manufacturers need to reimagine and redesign roles to accommodate changing needs and markets post-crisis? Flexibility will be key in order to optimize productivity and thrive in the new normal.
Recovery
Recovery is about more than bringing workers back and ramping up production. For many manufacturers, it’s also about finding opportunities. Opportunities to scale innovative processes that worked well at the start of the crisis. Opportunities to leverage digital tools to greater effect—such as the use of scenario planning and remote work. And even opportunities to merge or acquire new entities.
It’s not insensitive to understand the opportunities a crisis presents. As seen in the past, all crises will have their winners and losers. Manufacturers that see how this is an opportunity to assess the future of customer value, their business models, and their capabilities and assets are more likely to be the winners.
Manufacturing post-pandemic
No one, of course, knows when COVID-19 will abate and how markets will react. For right now, uncertainty is the only certainty. That means scenario planning is the mantra of most manufacturers as they prepare for the current and future business cycles.
But overall, there’s consensus that resiliency is more important than anyone realized. Resiliency in this context means the ability to reconfigure your processes and operations and strategies to meet whatever comes next. Because if there’s one thing manufacturers definitely agree on, it’s that this crisis is far from over.
Vincent Rutgers is the Global Industrial Products & Construction (IP&C) Sector leader with Deloitte Touche Tohmatsu Limited (Deloitte Global) and a Consulting partner with Deloitte Northwest Europe based in The Netherlands. The IP&C sector is among the largest in Deloitte’s global portfolio in terms of revenues and covers six segments, including: Aerospace and Defense, Construction companies, Industrial Conglomerates, Industry Products, Heavy Machinery and Equipment, and (Japanese) Trading House clients. Vincent directs a global network of partners and professionals to grow Deloitte’s relationship with strategic clients, delivering the full suite of business solutions and capabilities that Deloitte has to offer.
Prior to joining Deloitte, Vincent worked in various consulting roles for other professional services firms. His distinguished 30+ years of experience includes roles within industry focused on production process optimization for global manufacturing and telecommunications companies including Texas Instruments, Philips and AT&T Network Systems.
Vincent holds an MBA in Marketing from TiasNimbas Business School and a Bachelor in Commerical Engineering from Twente university, both in The Netherlands. He also completed post-graduate courses in marketing management and strategic thinking from Wharton Business School in the United States.
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