Subscribe
Share
Share
Embed
Sheldon Macdonald and Nathan Sweeney talk about the topics driving the markets in their weekly Monday update.
Monday Espresso Podcast - 12th February 2024
[00:00:00] Sheldon MacDonald: It's the 12th of February. Excellent week, last week we had the S&P 500 in the US hitting a record high, touching over 5,000 points. That was up 1. 4%. Even stronger than that, though, was the NASDAQ. The NASDAQ up 2. 3%. Driven, really, by the megacap tech stocks. Nathan, your thoughts about this? Is this too good to be true?
[00:00:23] Nathan Sweeney: So, ultimately, what we've seen is the S&P has crossed this 5,000 milestone but I suppose the real question is, why are people, or the market, fixated on this? It's just an arbitrary number, really so why not 4,900 or 5,100? So it's more important for me is the reason why, so what's driving the markets at these higher levels?
[00:00:45] Nathan Sweeney: Now, the first thing is economic strength. So we do know that the U.S. Economy has been quite resilient in the face of higher interest rates and clearly that's good for companies because those companies are generating profits in a stronger economy.
[00:00:59] Nathan Sweeney: Earnings are also holding up, which is really good for markets and you could see that between the different performance between the S&P and the NASDAQ, which is tech heavy, because it's those technology companies which have been delivering good earnings and driving the market forward.
[00:01:14] Sheldon MacDonald: Yes. Let's speak a little bit about earnings. So we've spoke last week, Q4 earnings season underway. Last week, we mentioned that it was looking fairly good. Less good this week. The proportion of companies that are beating expectations is still around about the average level, but the amount by which they're beating, that's coming in slightly below average. So at the moment, not an awesome picture on earnings, but just about okay.
[00:01:39] Sheldon MacDonald: You mentioned the growth picture there in the U.S. Growth has been strong, but this has been the question on people's lips about that growth. Is the growth too strong for inflation to fall? And that was why the previous week's inflation figure really gave the market pause for thought and why we saw a negative reaction.
[00:01:57] Sheldon MacDonald: But for the moment, what we saw last week, revised inflation figures coming in lower than that first report. So that was again, a slight boost to market sentiment last week. Again, a slight word of warning though, what we've got with the strength in the markets that we've seen is that the markets now are trading at valuation levels that are looking fairly rich.
[00:02:18] Sheldon MacDonald: The S&P now trading at 20 times forward earnings levels. Now that, on the positive side, that indicates confidence in the market. Confidence on policy makers, confidence on the banking system, confidence that corporate earnings are sustainable.
[00:02:33] Sheldon MacDonald: On the other hand, we've only hit this level twice before and that was in the bubble period around the turn of the century and in the post COVID rebound.
[00:02:41] Nathan Sweeney: Yes, interesting comment there, because ultimately that might cause investors to be concerned about the what next piece, but you have to remember that a lot of the performance has been driven by a handful of stocks in the U.S. and ultimately those companies are quite profitable, they're world leaders, they've got great technology so a lot of the share price moves are warranted in that space.
[00:03:04] And actually, if you look at the Magnificent Seven, one of them is not so magnificent this year. So Tesla, as an example, which is very much at the forefront of electric vehicles, but there is expected to be lower electrical vehicle demand this year, so the share price of that stock is off but the share price of the other six has been driven by AI.
[00:03:25] Nathan Sweeney: Now the other important thing to highlight before I move on from this topic is the interest rates are expected to fall so we do expect to see broader participation from the rest of the companies, not only in the U.S. but globally.
[00:03:38] Nathan Sweeney: So we do think there'll be a change or a rotation as those interest rates come through and there'll be other drivers of the market coming through.
[00:03:47] Sheldon MacDonald: Yes. Let's take a tour quickly around the rest of the world. Let's start with Europe, where just some reading I did this week indicated that perhaps the first rate cut in Europe might come ahead of the first rate cut in the U.S.
[00:04:01] Sheldon MacDonald: Now we know that, we've been speaking about for the last couple of weeks, the expectations for rate cuts in the U.S. being pushed out from March to May, perhaps to June, I've seen somebody indicate that perhaps the first rate cut in Europe might come as early as April. Now that's on the back of sluggish demand there, but as well as lower energy costs and a continued easing of the supply chain bottlenecks.
[00:04:22] Nathan Sweeney: Yeah, so that's Goldman Sachs basically produced a lot of research and they think that interest rates are going to come early than most people expect. You have seen interest rate cuts expectations being pushed out. So from our perspective, we're expecting to see the U.S. cut rates first in May and then we think the UK and Europe will follow suit in June.
[00:04:42] Sheldon MacDonald: You mentioned the UK. So the interesting point here is that it's becoming clear that for the Tories in the UK, easing fiscal policy, that is a lower tax burden is going to be central to their re-election ploys. Now that will give a slight upward boost to GDP expectations, clearly that will be a positive for the market.
[00:05:03] Nathan Sweeney: Yeah, and again, you have to remember around election years, that tends to be the number one tactic of parties to try and win political votes. It's the giveaway to those voters. We should expect to see the same in the US. So that rhetoric ramping up as we move towards those elections.
[00:05:19] Sheldon MacDonald: And then finally, let's just chat about China, China continuing to spiral a little bit lower and lower, mutual fund allocations, so professional investors, their allocations to China are at a 10 year low. So at about five and a half percent of global portfolios. The indication there is that those investors believing that the policy measures that China has been putting through are really too little, too late. On the other hand, Nathan, I know you've got a positive take on this.
[00:05:47] Nathan Sweeney: Yeah. So I agree. Too little, too late. We do expect to see more stimulus coming through from China and clearly it is quite unloved at the moment and that's a nice contrarian indicator. So it's an area that we're watching quite closely. The market is closed this week for Chinese new year, but it'd be a nice time for the government's actually to step up that stimulus.
[00:06:06] Sheldon MacDonald: As you say, China closed this week, but what are we looking for elsewhere this week?
[00:06:10] Nathan Sweeney: There's actually quite a lot of data coming out this week. We've got inflation data in the UK, which a lot of people would be focused on.
[00:06:16] Nathan Sweeney: We've actually got GDP data too. So is the UK in a technical recession or not? So economic growth is likely to be quite subdued, call it around 0.1% or minus 0.1%. We have retail sales as well in the UK. I mentioned Chinese New Year, so the market is closed. We've got inflation data in the U.S, as well. But company earnings, so the likes of Coca Cola, Cisco, John Deere, reporting earnings this week.
[00:06:41] Sheldon MacDonald: Lots going on, lots to talk about, and we look forward to bringing you all that next week.