Equity investor’s nerves are once again being tested; on reflection the recent events regarding Tesco's cannot have helped sentiment. For a blue chip company such Tesco, a corner stone of every portfolio from Warren Buffet to the experienced portfolio manager, to the widow and orphan, not many predicted such a fall from grace. When these events happen it shakes investors confidence.
History has seen from time to time other blue chips fall by the way side, but traditionally one associates it more with industrial companies impacted by technology changes or a failure to innovate. One thinks of car stocks, or Rolls Royce and more latterly General Electric after it attempted to morph into a telecoms giant under the name of Marconi. In the case of Marconi, a new management team too easily influenced by smooth talking investment bankers replaced a more prudent one. Rolls Royce collapse in 1971 was caused by the failure of the RB 211 jet engine, resulting in the government nationalising the company.
Some will argue Tesco's demise is self-inflicted, after unsuccessful ventures to foreign shores (now trying to retreat from) and taking its eye of the domestic market, allowing in competition from abroad. Time will tell whether this once apparent indestructible giant will recover from its current predicament, and add support to the adage what does not kill you makes you stronger. There are those companies that have risen from the ashes, Next are a perfect example. The share price of Next traded one point 20 years ago at 13 pence.
Equity markets tried to consolidate on Wednesday after Tuesday's retreat, the FTSE 100 is now bang in the middle of its yearlong trading range. The S&P 500 is a couple of percent above its previous support levels this year of 1950. Investors continue to debate the impact the Fed no longer buying assets will have on asset classes? Will the Fed be replaced by the ECB as the next liquidity provider? Are China, once an engine for global growth, now and a problem child? Is the fact the US yield curve has flattened this year telling us the bond market is more concerned on growth than the equity market? Some will question where is the good news coming from? Are acquirers over paying for revenue growth?
These are all important questions as we approach October a time of the year that has traditionally seen some stock market volatility. The path of equities is rarely smooth, but historically the time to be truly fearful is when we feel there is nothing to fear.