Choppy Summer Seas

Charlie Parker
Charlie Parker

This week was marked by an increase in market volatility. We believe that this is to an extent a reflection of investors coming to terms with the extent to which the surge in virus cases in the United States will slow the recovery. This is a reality we positioned for some weeks ago. It has however been spurred by this week’s meeting of the Federal Reserve.

We heard encouraging words from the Fed but it was evident to investors that for the time being they are likely to get little in the way of additional support. The steps the Fed could take from here would have to break new ground, and they will be reluctant to do that when some form of economic recovery remains underway.

The other significant news this week was that the largest technology companies in the United States posted Covid-busting earnings. Apple, Facebook Google and Amazon all signify beat their estimates.

Whilst this suggests that investors love affair with the FAANGS – and with quality growth companies generally – is unlikely to end anytime soon it did come in the week that the future for monopolistic technology companies came under close scrutiny.

In an oddity that only the Coronavirus could produce Amazon chief executive Jeff Bezos, Facebook chief executive Mark Zuckerberg, Apple’s Tim Cook and Google’s Sundar Pichai on the same zoom call with the US Congress.

This had the benefit of saving the planet from four separate private jets from San Francisco to Washington D.C but also of shining a spotlight on the key question of whether a Democratic senate and house – under a Biden presidency – would work actively to break up big tech.

The breaking up of big companies – ‘anti-trust’ action in US parlance – has characterised American society since the 18th century. Each time an industry has developed a hugely innovative technology which produces enormous profits the US Federal Government has intervened to break up that sector and disperse the money across the economy.

Whilst Donald J Trump likes to compare himself to the gun-slinging Theodore Roosevelt he has not chosen to break up the enormous technology companies in the way that Roosevelt broke up the railroad companies. One also doubts if Trump could make it up onto a horse as Roosevelt did.

This lack of anti-trust action has contributed to a 20-year trend which has seen large corporations controlling an ever larger portion of US gross domestic product. The labour share of GDP (the amount that goes to ordinary people) and the level of income inequality have all risen.

(Elhauge 2016)

A lesser significant side-effect is that these dominant growth companies which control this innovation have gone unchecked and therefore perhaps unsurprisingly outperformed all-else in the stockmarket.

Should Biden’s polling prove true and the Democrats end up controlling both house of congress and the White House these companies could find their day has come.

Until then however they can fairly easily bat away the objections of congressmen and enjoy the extraordinary earnings they have delivered in the face of a global pandemic.