This is our weekly market update covering the US, Europe, Asia and Australia plus gold, oil and bitcoin.
This was another volatile week on the markets, as traders played the volatility card and as U.S. stocks fell on Friday with the Nasdaq showing the largest decline after a hotter-than-expected producer prices report eroded hopes for imminent interest rate cuts by the Federal Reserve. Higher for longer.
Earlier this week, a hot consumer prices report sparked a selloff in equity markets as Tuesday’s latest US Consumer Price Index inflation report for January showed both headline and core prices in both monthly and annual terms climbed faster than economists’ forecasts. The former rose 3.1% year-over-year last month, hotter than the +2.9% expected. That makes it harder for the Fed to cut rates. Then later a slump in January retail sales on Thursday stoked hopes of rate cuts.
Fridays producer price index for final demand rose 0.3% last month after declining by a revised 0.1% in December, the Labor Department’s Bureau of Labor Statistics said.
Higher for longer was reinforced by Atlanta Fed President Raphael Bostic who said he needed more evidence inflation pressures are easing, but is open to lowering rates at some point in the next few months and San Francisco Fed President Mary Daly said “there is more work to do” to ensure stable prices, despite remarkable progress.
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This is our weekly market update, starting with the US, Europe, Asia and Australia, as well as Oil and Crypto.
The S&P 500 soared to fresh highs on Friday, but fewer stocks have been participating in the rally, stirring worries that recent gains could reverse if the market’s leaders stumble.
We are talking market breadth, or the number of stocks taking part in a broader index’s rise. A high breadth is often viewed as a healthy sign by investors as it shows gains are less dependent on a small cluster of names.
The reverse, a narrowing, on the other hand is a warning. And in fact, the Magnificent Seven have accounted for nearly 60% of the S&P 500’s gain this year, according to Dow Jones Indices.
The problem is the narrow group of stocks powering the market could make it more vulnerable to swift declines if an earnings disappointment or other issue hits its biggest stocks. While most of the megacaps have powered higher this year, shares of Tesla have fallen 22%, the third-worst performer in the S&P 500, demonstrating how quickly the market’s superstars can fall out of favor.
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This is an edited version of a live discussion with Damien Klassen, Head of Investments at Walk The World Funds and Nucleus Wealth. Markets are rising, thanks mainly to AI related stocks, while expectations of rate cuts are being pushed out. More broadly, are returns able to justify current valuations, and which sectors are the most interesting ahead.
Original stream with chat here: https://youtube.com/live/lqYE35qTatw
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Digital Finance Analytics (DFA) Blog
DFA Live Q&A HD Replay: Investing Now With Damien Klassen
Investors hate surprises and we got many this week – to the point where I begin to wonder whether markets are fundamentally broken as they were driven higher by good results from some of the magnificent seven, despite the shock revelation of mounting losses from commercial property by little-known banks in New York and Tokyo. And then the US jobs number came in so hot, as to lift bond yields while Central Bankers this week played a cautious hand, suggesting that they need to see more evidence before they start cutting rates, against market expectations.
Let’s start with commercial property. The problems particularly the office sector are well known: a combination of remote work and ageing buildings has pushed up vacancy rates and pushed down valuations; office property values in the US fell more than 20 per cent last year.
That’s a problem for landlords that must refinance loans against commercial property; about $US2.2 trillion of loans from the US and European commercial real estate sectors will come due between now and 2025.
US property billionaire Barry Sternlicht told a conference this week the US office property sector was worth $US3 trillion, and now it’s worth $US1.8 trillion. “There’s $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is.” At least some is in America’s regional banks, where commercial property loans account for about 30 per cent of all loans, compared with 6.5 per cent at large US banks.
Regional US lender New York Community Bancorp and Japan’s Aozora revealed problems with commercial property loans and dropped their share prices significantly underscored a critical question: is this the start of something bigger? Morgan Stanley strategist Mike Wilson says that even if banks holding this debt can cope with the losses, it crimps their ability to lend to other businesses.
But if there’s one broader lesson from the sudden re-emergence of commercial property fears, then it’s this: we still haven’t cleared out the excesses that built up in the era of very low interest rates, and were compounded during the pandemic period of extreme froth.
The world is now so indebted, and so financialised, that these cycles aren’t allowed to occur. With “households and corporates becoming hooked on leverage”, we can’t let bubbles pop because they’re “the essence of our economies”.
This is why investors are cheering the prospect of rate cuts with such gusto. And it’s why the fear of higher-for-longer interest rates – which the Federal Reserve reminded the world of on Thursday by killing off hopes of a March cut – is still real.
“The market has been horribly wrong about the near-term trajectory of Fed policy and this is another instance where that’s the case,” said Kevin Gordon, senior investment strategist at Charles Schwab in New York.
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Digital Finance Analytics (DFA) Blog
Markets Play Chicken With All Time Highs, As Risks Rise!
This is an edited version of a live discussion with Damien Klassen Head of Investments at Nucleus Wealth and Walk The World Funds. We reflected on the market switch from October, and what this means for 2024. Are we out of the woods yet? We also looked at some of the important mega-themes which will shape investing ahead.
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Digital Finance Analytics (DFA) Blog
DFA Live Q&A HD Replay: Investing Now With Damien Klassen
This is our annual review of the financial markets, and weekly update.
As we close out 2023, the analysts are talking about the great market rally in the year (perhaps conveniently forgetting the falls of 2022.) The S&P 500 slipped in the final session of 2023 to end the year up 24 per cent, but the two-year trip is back to where it started. The Dow Jones Industrial Average and the Nasdaq Composite both dipped on Friday but were 13.7% and 43.4% higher for the year, respectively, while MSCI’s world share index posted a 20% gain, its most in four years.
True, this year might go down as one of the most unusual ever in financial markets – mainly because everything seems to have come good despite a lot of turbulence and many predictions turning out to be wrong. And this against the backcloth of more regional conflicts, pressure on the consumer, and rising Government debt.
U.S. Treasuries finished the year broadly where they started after major swings for the benchmark in 2023. In the bond markets, just a few months ago investors were expecting the Fed & Co to raise rates and leave them there while recessions rolled in. Now bond markets are looking to central banks to embark on a rate-cutting spree with inflation apparently beaten.
Equity markets have gone up so quickly that they’re highly vulnerable to a pullback if the US economy slips into even a mild recession, according to Royal Bank of Canada’s fund management arm.
The greatest risk to the stock market in 2024 (bonds & metals) is the scaling down of market expectations for rate cuts as a result of renewed gains in inflation. Any credible and consistent signs of renewed inflation (not one-off bounces or base effects) would be punishing for markets. But even if you think the probability of such inflation rebound is minimal, there is always the typical volatility in a US presidential election year.
According to seasonality studies stretching to 1900, April and May tend to be challenging months during US election years, but October fares worst as far as consistency of selloffs.
A third risk is that of persistently swelling budget deficits and the ever-expanding amounts of new debt issues to refund existing deficits. This could easily ignite another “bond market event” similar to September 2019, March 2020, or September 2022 in the UK.
Regional conflicts might well proliferate, causing more market turmoil. And finally, next year won’t be quiet on the political front. There are more than 50 major elections scheduled next year, including in the United States, Taiwan, India, Mexico, Russia and probably Britain. That means countries that contribute 80% of world market cap and 60% of global GDP will be voting. Taiwan kicks it off with elections on January 13, followed just a few days later by the New Hampshire primary for the 2024 U.S. Presidential race.
And remember from just before that stock panic in late February 2020 to mid-April 2022, the Fed ballooned its balance sheet an absurd 115.6% in just 25.5 months for crazy-extreme monetary inflation! Other central banks did the same. That monetary base more than doubling in a couple years is the dominant reason inflation has raged in recent years. The FOMC finally realized how dangerous its extreme monetary excesses were in mid-2022 as reported inflation soared. So the Fed has shrunk its balance sheet 13.8% since then. Yet crazily over these past four years, that monetary base has still skyrocketed 85.4% thanks to the previous decade’s growth! Inflation therefore is still in the system, “This is an era of boom and bust,” BofA said. “We are not out of the woods.”
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This is an edited version of a live Christmas discussion with Investment Manager Tony Locantro, as we reflect on the markets over the past year, and look ahead into 2024.
This past week was a doozy in the markets as the Fed started to flip the switch on monetary policy, which took the markets by surprise. Yields plunged. Stock and bond prices soared. And this time, it’s more than the Magnificent Seven stocks leading the charge.
The Russell 2000 ETF has more than doubled the return of both the S&P 500 and the Nasdaq 100 over the last month. And the S&P Regional Banking ETF, which has taken the brunt of the bears’ ire this year and is still down YTD, has surged ~36% since the beginning of November.
The markets feverish speculation about future interest rate cuts has further loosened global financial conditions, storing up risks for euphoric stock and bond markets if central banks view the easy funding environment as a reason to hold borrowing costs high.
Both Goldman Sachs and Jefferies said long/short hedge funds, which take positions betting stocks will rise and fall, got hit hard after Fed Chair Jerome Powell’s comments on Wednesday.
The investment bank’s global markets team said systematic long/short funds, based on a computer-driven strategy, were down 2.8% on Thursday, the worst single day since at least January 2016.
And in fact on Friday US equities gave back some of their weekly gains while the dollar advanced after New York Fed President John Williams told CNBC it was premature” to be thinking about a March rate cut”.
Williams’ Atlanta counterpart, Raphael Bostic told Reuters he was only pencilling in two quarter-percentage-point rate cuts in the latter half of 2024. Swaps traders were eying as many as six rate cuts for next year.
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As we count down to the end of the year, U.S. stocks closed higher on Friday, with the S&P 500 and Nasdaq notching their highest closing levels since early 2022 and the Dow notched its longest weekly winning streak since 2019.
A robust U.S. jobs report fuelled investor optimism about a soft landing for the economy and so investors pared bets that the Federal Reserve will cut interest rates in March after a Labor Department report showed nonfarm payrolls increased by 199,000 jobs in November, compared with an estimated increase of 180,000.
The unemployment rate slipped to 3.7%, while average earnings edged up to 0.4% on a monthly basis, compared with forecasts of 0.3% growth. The uptick in wage growth, which risks boosting inflation, muddied the optimism for rate cuts, pushing Treasury yields higher, though some economists were quick to downplay the strength of report attributed to the return of employers that were on strike.
“Were it not for the strike, November would have been somewhere around 170k and October would have been around 180,000,” Jefferies said in a Friday note.
Interest rate futures show traders widely expect the Federal Reserve to hold interest rates steady at its meeting next week. However, futures prices now imply traders mostly expect the Fed to start cutting rates in May, two months later than the March meeting many investors had been betting on in recent days.
Treasurer Jim Chalmers confirmed the Reserve Bank of Australia board should aim to return inflation to the middle of the 2 to 3 per cent target band, or 2.5 per cent. Treasurer Jim Chalmers has axed a controversial proposal requiring the Reserve Bank of Australia to give “equal consideration” to full employment and inflation as part of a new agreement that may mean interest rates stay higher for longer.
The backdown followed warnings by the likes of former RBA governor Ian Macfarlane and former treasurer Peter Costello, who said the proposed wording was vague and would make the RBA less accountable for fighting inflation.
IFM Investors chief economist Alex Joiner said targeting the middle of the band made the prospect of a rate cut unlikely until late 2024, given the RBA’s current inflation forecasts do not show it achieving 2.5 per cent inflation at any point in the next couple of years.
Digital Finance Analytics (DFA) Blog
Market Optimism Continues Thanks To US Soft Landing Hopes...
