This past week was always going to be a pivotable week for US equities and bonds given the abundance of economic data, the first FOMC rate decision of the year, and gobs of S&P 500 earnings, including five of the infamous “Mag 7” tech giants. The week also had the first monetary policy decision of the year from the Bank of England. In summary:
Both the Fed and BoE did nothing just as expected, with both central banks reaffirming their stance that “higher for longer” should be the base case until it is more clear that inflation has been conquered.
Earnings were reasonably good, especially for the “Mag 7” companies that reported.
Economic data continued to suggest a reasonably resilient US economy and a stagnant Eurozone economy, with inflation heading in the right direction albeit slowly now in both economies. US payrolls for January, released Friday, were the shocker of the week, with US job growth far exceeding expectations and unemployment remaining at 3.7% (BEA report for January here)
The effect on risk assets was generally favourable, albeit modestly perhaps, except – of course – for Chinese equities, which remain under severe pressure. US Treasury bonds were better across the maturity spectrum for most of the week, although Friday was a different story with yields increasing sharply following better-than-expected US employment data for January. If you want to go straight to the “Markets” section, click here.
WHAT MATTERED LAST WEEK
Tech giants report
Expectations were so elevated going into the week for the five Mag 7 companies that a post-earnings letdown seemed inevitable. Earnings from five tech giants – Microsoft, Apple, Amazon, Alphabet (Google) and Meta Platforms (Facebook) – were good, as nearly all (except GOOG) met or beat top and bottom-line consensus analysts’ expectations. However, this wasn’t good enough for Alphabet and Apple, with the former hurt by lower-than-expected advertising sales, and the latter hurt by declining sales in China. In contrast, Meta and Amazon served up some seriously impressive results and more robust outlooks. META not only beat analysts’ consensus expectations by a mile, but also increased its stock buyback programme (to $50 billion) and will start paying a quarterly dividend, sending the shares sharply higher (META press release here). AMZN also delivered stronger-than-expected results, suggesting that its cost-cutting measures and more focused business strategy is working (AMZN press release here). With this all said, I still believe the most defensive of these companies is MSFT, which beat its numbers and provided a positive outlook across its portfolio of companies (MSFT earnings release here).
I have no intention of abandoning my Mag 7 names (MSFT, AAPL, AMZN, GOOG). I have been an investor in these companies for many years, and I still believe each has defensive positions in their core segments and are poised to continue to grow (in spite of difficulties in China for Apple and “AI risk” for Google search). That’s spoken by a long-term investor, not a punter. Of course, I am happy not to be in TSLA, but feel slightly ashamed not to be in NVDA or META, since I have owned both stocks on multiple occasions in the past but bailed out on valuation concerns.
The table below summarises actual top and bottom line results (rightmost columns) for the tech giants that reported their quarterly results last week, compared to analysts’ consensus expectations (and perhaps the more reliable “Earnings Whispers”).
This table below shows the WoW performance of the share prices of all of the Mag 7 companies and AMD. As you can see, META was the outstanding performer with nearly all of its gains coming on Friday post-earnings. AMZN (reported Thurs) and NVDA (did not report last week) also had a good week. APPL and GOOG were the laggards, both losing ground post-earnings.
AI continues to be a real opportunity for investors, with the chip companies particularly in focus. This is why I included AMD (reported Tuesday) in the tables above. Chip company stocks have been a mixed bag, with AMD trying to claim “second best” behind the clear leader in AI chips, NVDA. INTC also stumbled further last week, ironically pleasing me in some respects since I held the stock for a long time, finally dumping the shares a couple of years ago after the price went sideways for years.
If you are interested in knowing more about how the earnings season is going so far for S&P 500 companies, LSEG I/B/E/S provides an excellent end-of-week summary which you can find here.
Central bank decisions: the Fed and BoE
There were no surprises from the Fed or Bank of England, other than further emphasis from both that inflation is not yet in the “2% safe zone”. The conclusion is that investors should prepare for a pivot later than expected, or certainly later than has been priced into stocks (in the US) for several months. This seemed to dawn on investors late in Wednesday’s session when – during the post-FOMC press conference – Mr Powell said quite definitively that a March decrease in the Fed Funds rate was not on the table. From that point onwards, equities tanked, although they recovered some ground on Thursday as “buy-the-dip” buyers rocked up, and the momentum was sustained on Friday as Thursday’s post-earnings releases from AMZN and META pushed markets higher. Hot US jobs data on Friday validated the Fed’s “wait and see” data-dependent attitude.
Andrew Bailey was equally clear on Thursday in implying that the BoE was nowhere near cutting its policy rate given that inflation in the UK remains elevated vis-à-vis the US and Eurozone. Having said that – and in spite of its “single mandate” to maintain inflation at 2%/annum – the UK remains in dire straits economically. It is an election year (most likely), another reason that I believe the BoE will capitulate and ease its Bank Rate sooner than expected. The issue is that I don’t expect it will matter that much, with attention focused on the much larger and important economies of the US and the Eurozone. Let’s see.
ECB: March 7
Bank of Japan: March 18/19
Federal Reserve/FOMC: March 19/20
Bank of England: March 21
MY TRADES THIS WEEK
I added a small amount to my position in VISA (V) early in the week after the shares declined post-earnings. The stock is no longer cheap, but it is a name I like. I also lightened a bit on a few non-US ETF positions (UK corporate bonds, the STOXX 600 (Europe) and the Nikkei 225 (Japan)) to start a new position in Novo Nordisk (NVO). NVO might be considered a “weak sister” to LLY but the company has a similar portfolio of weight loss drugs which – like AI – seems to have staying power. I will build on this position over time depending on opportunity and performance.
MARKETS LAST WEEK
Global equities were mixed, with Japanese and US equities racking up gains while Chinese equities continued to decline. The Shanghai Index declined over 6% WoW and is now down 8.2% YtD. That is starting to hurt investors like me that are waiting for a rebound in Chinese stocks that feels like it may never come.
US equities were largely better off the back of good earnings especially from MSFT, AMZN and META. The strong US jobs report also suggested that the economy remains in good shape, increasing confidence in future earnings. The Russell 2000 was the outlier though (-0.8% WoW), suffering from its correlation to higher yields.
US Treasuries rallied through Thursday, and then cratered after the US jobs report on Friday morning giving back much of their gains for the week. Yields at the more policy-sensitive short-end of the curve actually finished slightly higher.
Credit spreads, which many consider a potential leading indicator for risk-off, widened across the curve, keeping in mind that the last read was at the Thursday close, pre-jobs report.
The US Dollar rallied after the jobs report as the strong US jobs market reinforced the “higher for longer” mantra. Gold was slightly higher, and oil sharply lower by the end of the week.
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Corporate bonds (credit)
Safe haven and other assets