In a nod towards the 70’s sitcom ‘Open all Hours’ (the re-engineered version was cancelled this week) it’s been a funny old month.
I caught up with some friends at the start of the month and we got chatting. We were discussing markets and what I do to engage with clients and after explaining, I received the following retort.
Yeah, I know some friends eh, but seriously it got me thinking so this months update is a wee bit different, here goes….
In the last month the FTSE100 hit record highs, driven once again by energy companies; the Scottish First Minister resigned; the Prime Minister is attempting to resolve the Northern Ireland protocols and the US has been shooting down UFO’s (Chinese weather balloons).
In the US most U.S. stocks are powering ahead. A dramatic change from last year when the S&P 500 finished 2022 with a 19% decline (its biggest pullback since 2008), the Dow Jones Industrial Average lost 8.8% and the Nasdaq tumbled 33%.
At the end of the year many commentators were wondering if the US’s high-flying stocks, which were built on years of quantitative easing, had had their day? Now barely 2 months later they’re asking if the bear market of 2022 is over?
The kind of action being seen has pundits, experts, and CEOs doubting the possibility of any kind of severe recession and the thinking is that the Federal Reserve will pull off a “soft landing” after its series of interest rate hikes. A soft landing is a “cyclical slowdown in economic growth that avoids recession.”
Support for this idea comes from the fact that the Fed has raised interest rates significantly since March 2022, lowering inflation to about 6% from around 10%. The labour market has remained strong throughout, with the unemployment rate at 3.4%. Because inflation is on the decline, Wall Street is expecting or that could be hoping that rates will begin to decline sooner than later.
Well I’m reminded of a passage from the classic book on investing, “One Up on Wall Street” by Peter Lynch: “In centuries past, people hearing the rooster crow as the sun came up decided that the crowing caused the sunrise. It sounds silly now, but every day the experts confuse cause and effect on Wall Street.”
On Wall Street, the roosters are stock prices. It seems that the experts now are confusing stock gains with the underlying economy’s health.
Fundamentals still matter. The crowing of the rooster (prices going up) does not mean that the fundamentals have improved. The recovery is still early, there will be bumps in the road so we don’t want to get ahead of ourselves.
We all want to look at portfolio values that are increasing, it lifts us, but it can be temporary so while the positive news is welcomed, we won’t suddenly be taking huge risks with portfolios.
U.S. stocks rebounded from early losses on Thursday afternoon, putting them on track to snap a days long selloff driven by concerns about the trajectory of interest rates. The S&P 500 climbed 0.5% and was positioned to break its longest losing streak this year. The Dow Jones Industrial Average rose 0.2% after initial declines.
The gains follow a wave of selling pressure that sent the S&P 500 down 3.8% over the previous four trading days. Concerns that the Federal Reserve could lift interest rates higher than previously expected, and maintain them there for longer, have been a key driver of those losses, and have stoked volatility across asset classes.
The release Wednesday of minutes from the Fed’s most recent meeting did little to offer investors clarity. While the minutes showed that central bankers unanimously backed lifting rates by a quarter-percentage point at their last meeting, they also showed that a few officials favoured or would have also agreed to a larger half-point increase.
That sent stocks—and particularly shares of tech companies—oscillating between gains and losses Wednesday and Thursday as traders tried to determine where interest rates will go next.
In the UK shares climbed higher again on Friday as gains in Rolls-Royce boosted aerospace stocks and higher oil prices lifted energy giants, with investors looking ahead to U.S. personal consumption data due later in the day.
The blue-chip FTSE 100 gained 0.3%, but was on track to post its biggest weekly decline in five weeks.
Analysts were also waiting for the latest reading on U.S. core personal consumption expenditure, which is expected to rise 0.4% for the month of January, according to a Reuters poll.
“The market will wake up to the fact that the Fed funds rate will have to stay long higher for longer instead of being calculated this year,” said Janet Mui, head of market analysis at RBC Brewin Dolphin.
The FTSE 100 has had a great start to the year so far, recording multiple record highs on its journey above the 8,000 points mark as some positive earnings and higher commodity prices have helped the index outperform U.S. counterparts.
Market research firm GfK said British consumers have turned more upbeat about their personal finances and the outlook for the economy but their mood remains a long way off pre-pandemic levels.
Just further evidence of the fragility of the markets which want certainty and there is currently very little.
US Tech stocks that have been the darling of the markets are no longer as in vogue, instead ‘old economy’ such as energy, materials and housing are leading the way. And back to the fundamentals of the economy itself, it isn’t clear that inflation is actually slowing as much as the market might have you believe.
While things are looking up, there is still a way go.
The real benefit of financial planning is peace of mind. Peace of mind, security and confidence that your financial matters are taken care of.
Having a clear plan and picture of your financial landscape lets you take considered decisions and not react when the markets are volatile for extended periods.
Having someone to talk to just makes things better!