Weekly Market Insights - 14th February 2024
Let's dive into what's been happening in the world of investments this week.
Here's what I'll be covering in today's newsletter:
- S&P 500 surpasses 5,000
- Overvalued or just the beginning?
- It’s the banks again
- Rates are staying high
- China’s deflation problem
- Suspicious UK housing data
Current Market Fear & Greed
The current reading of 78% from CNN indicates a high level of confidence from investors. This has increased from last week.
The stock market is a barometer of investor sentiment. When investors feel greedy, the market tends to rise; when they feel fear, it tends to fall.
Market Insights
This week, the S&P 500 hits a milestone, banking sectors face unexpected losses, and tech valuations spark debate. Plus, I break down China's economic challenges and the surprising trends in the UK housing market. If you're looking to make informed financial decisions in 2024, you're in the right place.
1. S&P 500 surpasses 5,000
This week, the S&P 500 index continued its impressive performance, surpassing the 5,000 mark. A significant contributor to this success is the growth in technology companies, especially ARM Holdings PLC and Nvidia. These firms have performed well, supported by advancements in AI and chip production, which are increasingly important in today's tech-driven economy.
Additionally, the latest US corporate earnings reports are quite positive, with about 80% of companies performing better than expected. This indicates a stable economy, reducing concerns about a slowdown and bolstering investor confidence in the market's foundations.
2. Overvalued or just the beginning?
Recently, tech companies involved in AI and chip manufacturing, have experienced rapid growth. This has been a major boost for the stock market. However, this surge in value has raised concerns about overvaluation, similar to the late 1990s and early 2000s dot.com bubble, when internet companies' values rocketed without solid financial backing, leading to a major crash.
To figure out whether a company's high stock price is justified, it's important to assess if the company is profitably growing and has a solid future plan. This understanding can help determine whether a stock's high price is reasonable or potentially inflated.
3. It’s the banks again
New York Community Bancorp (NYCB) recently reported an unexpected loss, surprising investors because banks like NYCB usually have a firm grasp on their financial status. This loss highlights that even well-prepared banks can encounter unforeseen issues.
A key challenge for NYCB and others in the industry stems from loans made for commercial real estate, like office buildings or shopping centres. The rise in online shopping and remote work has reduced the demand and value of these properties, complicating loan repayments. This trend is not limited to the US; banks across Europe face similar challenges due to the shift towards digital services and workplaces, decreasing the need for physical commercial spaces.
4. Rates are staying high
Central banks are currently cautious about adjusting interest rates, mainly due to uncertainty about whether inflation (the rate at which prices rise) is consistently decreasing. They're waiting for clear evidence that inflation is moving towards target levels before considering lowering rates. This cautious stance is to ensure that any rate decrease is implemented at the right time.
This uncertainty has led to unpredictable bond yields (the interest earned from government bonds). Generally, if rate cuts are expected, bond yields decrease. However, the current situation has caused fluctuations. For rate cuts to actually happen, central banks need to see economic indicators visibly improve, like stable prices and a healthy job market. The US shows promise with decreasing jobless claims, but Europe's economic situation remains mixed, though there are hopeful signs like an increase in German factory orders.
5. China’s deflation problem
In China, the Year of the Dragon has been marked by significant economic challenges. The government's attempts to stabilise the stock market, including leadership changes at the financial regulatory body and interventions like restricting short selling, have only provided temporary relief. These actions are short-term solutions and haven't addressed the deeper, structural economic issues.
Recent data from China indicates a worrying trend of deflation, the worst since 2009. This decline in prices is due to reduced domestic spending. The lower demand within China has international repercussions, potentially leading to decreased global prices for various goods and affecting countries that heavily trade with China. While lower prices can be beneficial, they also risk slowing global economic growth.
6. Suspicious UK housing data
The UK housing market in 2024 has surprisingly shown strength, with indices like Halifax and Nationwide reporting rising house prices. However, these figures are based on mortgage approvals rather than final sale prices and don't reflect the decreasing number of housing transactions. This reduction in sales is a significant indicator of the market's overall health, potentially offering a more mixed view than price data on its own.
Mortgage rates have fallen slightly, making borrowing more affordable, but they are still below the Bank of England's base rate, a situation that may impact banks' lending profitability. This, combined with the drop in transactions and the influence of broader economic factors like employment rates and consumer confidence, means an uncertain future for the UK housing market.
As we journey through challenges and opportunities, it's clear that the global economy is constantly evolving in unexpected ways. From the strength of the US stock market to the uncertainties in China's economy, investors need to navigate through so many factors. Staying flexible, well-informed, and strategic is crucial in adapting to these diverse market conditions.
