I’m Neil Birrell, Premier Miton’s Chief Investment Officer. Thanks for reading ‘Market Watch’, our monthly summary of the key events in financial markets.
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January – in brief
- After the surge in financial markets in the final 3 months of 2023, they took a pause for breath.
- Hopes for early interest rate cuts were pulled back as economic data was mixed.
- The corporate reporting season has kicked off with some big names announcing results.
It can’t always just be good news
It feels like all we talked about for the whole of 2023 was the much anticipated and hoped for peak in inflation and interest rates. The latter would have to follow the former and as inflation moderated through the year, hopes of interest rate cuts drove markets. These hopes peaked in December as the US Federal Reserve (Fed) indicated they thought the time was nigh as well.
However, that would be subject to ongoing evidence of inflation moderating and the economy slowing, and that didn’t come through as desired in the December data released in mid-January. Given that bond and equity prices had been so strong, it was unsurprising that equity markets globally were little changed, and bonds were a little lower.
The Fed met at the end of January and made no change to interest rates, which was obviously no surprise, but everyone was waiting to hear what they had to say about their views on the path for 2024. It was made clear that optimism over a reduction in March was unlikely to be met and so we are now looking at May or June as the starting point. That’s not too far away.
The UK economy has surprised many with how strong it has been, however, it cannot be considered to be in robust health, with recession being a real possibility. Although any significant recession does seem unlikely. This means that domestically we are looking at interest rates falling from a position of weakness, rather than a position of strength in the case of the US, but down they are coming.
To steal some news from the February edition of this note, on 1st February, the Bank of England announced that interest rates would stay the same, but all the focus was on what they had to say about the future, which did suggest that their emphasis was changing. They expect inflation to keep falling and are clearly concerned about keeping the base interest rate too high for too long and further damaging the economy.
They have a tricky juggling act to perform, between ensuring inflation is beaten and avoiding recession.
The darlings of the stock market
Large US technology and communications companies dominated stock markets through 2023 and the new year heralds “reporting season” when they, along with most companies around the world, tell us what profits they made the previous year and provide guidance on how the next year is looking.
On 1st February we heard from Meta Platforms (a.k.a. Facebook), Amazon and Apple. Many have been predicting a fall from grace for these companies, or certainly their share prices. Meta surprised investors with better than expected profits, impressive cost cutting measures, its first ever quarterly dividend and plans to purchase $50 billion worth of its own shares. Impressive! Amazon also beat profit and cost cutting expectations. The news was taken very well by investors.
Apple has been struggling for some time, with 4 successive quarters of declining year on year revenues, however, that ended in the final quarter of 2023, when it returned to growth. It wasn’t all good news though; the Chinese market has been a much sought after prize for Apple and it is struggling to break into it. The company was not overly optimistic for the outlook there either. The news from Apple was taken less well by investors.
These 3 companies, along with Microsoft, Tesla, Nvidia and Alphabet (the parent company of Google) have become known as the Magnificent 7, as a result of very strong share price performance. It seems likely that as we go through 2024, that number may dwindle.
2024 has got off to a reasonable start and as we look through to the spring and early summer when we should get clarity of the path for interest rates there is plenty of room for optimism. Until then, there is room for some disappointment as the best hopes for that path may not be met. Overall, the world economy does seem to be in pretty good shape and the valuation of financial markets do not seem over stretched.
However, that may hide many competing facets, and focusing on the right part of each market and individual companies and investments is likely to become the key determinant of how the year pans out for you.