After the traditional Santa Claus rally in the lead up to Christmas, global equities have stumbled a bit in the first week of 2024. In the US, the tech-heavy Nasdaq saw its worst two-day drop to start a year since 2005 amid a broad tech selloff. Apple fell nearly 6% while Amazon dropped over 4%.

Some view the pullback in big tech as overdue after the outsized returns they generated last year. The so-called "Magnificent Seven" stocks accounted for over 60% of the S&P 500's total return in 2023, raising some concerns over crowding into the space. The AI theme helped these stocks swim against the interest rate tide that, pre-2023, most thought would have afflicted all tech stocks. Then, when interest rate expectations dipped again in the last 8 weeks of the year the ‘Mag 7’ kept going, giving these stocks a sense of all-weather invulnerability. Last week has challenged this thesis, and possibly pointed to another factor - money and market liquidity. We talk about this more in the ‘What We Are Working On’ section of the Weekly, but increasingly it looks like the real driver in markets recently has been the US Federal Reserve and Treasury’s combined interaction with the financial plumbing system. It would be a lot simpler to ascribe recent optimism to declining inflation and a strong US economy, but it is clear that liquidity trends have also been very buoyant and less so in the last week and this might have been the confounding factor. This is something to watch out for, especially as the end of the year liquidity drought that the authorities might have been seeking to mitigate is now in the rear view mirror.

If we are seeing a bit of a sea change in sentiment, it is interesting to note that smaller global companies were also down around 3% in recent days along with the Nasdaq and the interest rate sensitives like local real estate trusts. Emerging markets (and especially Asian stocks) marched to a different tune and were up a percent or so. This change in sentiment is interesting to note but when all is said and done both local and global markets remain flat since the last newsletter on Christmas Eve (although hedged, or local currency, global equities are down 1% as the Australian dollar strengthened).  

As yields edged up, bonds have been on the back foot for the past week and with credit spreads also easing everything from fixed rate government bonds to floating rate high yield was down 0.5%-1%. Commodities were mainly stronger with oil, gas and soft commodities in the green and most industrial commodities, apart from iron ore which was up almost 5%, perhaps reflecting better (or less bad) news from China.

With less than two weeks until earnings season kicks off, attention will now turn to assessing the health of corporate profits amidst ongoing macro uncertainty. Globally, analysts currently expect modest profit growth of 1.3% for S&P 500 companies in Q4 2023.