The week that was

The to and fro of US markets last week resembled the titanic struggle between Nadal and Medvedev with bulls and bears trading blows that resulted in multiple 4% round trips during the week. After a sharp rebound late on Friday it ended up more or less a draw for the week with the Nasdaq level and the Dow Jones Industrial up just over 1%. During the week Jerome Powell added to the market jitters, failing to reassure markets that the Fed had a plan to balance growing inflation pressures with an economy and markets that have become dependent on cheap money. In fact, he didn’t really try to reassure anyone and was at pains to stress that the Fed did not have a crystal ball and that as data unfolded they were likely to take the sidearm first of consumers beset by rising costs, then the economy and lastly investors in shares (if their needs coincided with the first two). Then Apple’s results served to underscore the inherent strength of cash flows amongst US tech titans following a similarly strong result from Microsoft earlier in the week. In Australia strong iron ore prices were offset by falls in gold stocks which gave back earlier gains, while banks were also on the back foot. That left Australia down 2% along with emerging markets, while European stocks were also down and the UK stayed in positive territory due to strong commodity and energy prices.

This leaves the S&P 500 and the local S&P/ASX 200 down around 7% this year while the tech focused Nasdaq is down around 12% with market darlings like Apple, Microsoft and Google bearing the brunt of a change in sentiment in markets (until last week that was). The US market has borne the brunt of the intraday swings recently as the market seeks to discount the likely impact of higher interest rates in the all-important US government bond market and in particular the large US tech stocks (whose long-term earnings profiles are most affected by changes in discount rates). Last week though a higher-than-expected local inflation print brought some of that shorter-term rate uncertainty and intra-day equity volatility to Australian shores, underpinning the fact that inflation uncertainty is likely to reverberate around the world for a while longer. Looking through the noise though there has been a more consistent rotation throughout January - it is the same stocks that achieved outsized gains in the last half of 2021 that have been worse affected so far this year. While many markets that lagged last year are either up this year or have been left relatively unscathed. To put this in context:

• The S&P 500 is now back at the same level it was just before Christmas

• The Nasdaq has erased most of the gains from last year but it’s biggest constituents, Microsoft, Apple and Google remain up 25%, 40% and 16% respectively (even after double digit falls so far this year)

• The FTSE 100 remains in positive territory for 2022 and up 15% over the last year. Continental Europe is down a few percent this year but also up 15% over one year.

• Asian and Latin American Emerging markets have also been resilient this year, having fallen from grace last year, and so now trade on much more attractive valuation multiples. Many of the Chinese tech companies that were rocked by government intervention last year are actually up this year.

• Many managers with an ‘old school’ value approach significantly lagged the global equity market last year (even though they achieved returns of 10-20%) and are in positive territory this year.

Commodity markets remained largely buoyant last week although gains were concentrated in energy and soft commodities rather than metals (although iron ore was up) which may mean, tentatively, this is still more about geopolitical risk and supply chain disruptions as much as increasing economic activity. Bond yields also continued to rise in most of the world (and notably Europe) although they did fall back a little in Australia and (more importantly) the US. More ominously, modest rises in credit spreads started to gather pace, even if you would still call it an easing from historically tight levels. Still, this is worth keeping an eye on as the Fed has intimated that, while they are less likely to care about the stock market, the credit market and its role in providing liquidity to individuals and corporations is of much greater concern.

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