Week ended Jan 19, 2024: S&P 500 closes at record high

[GO STRAIGHT TO THE TABLES]

Let’s start with the bad news first.  The first three weeks of this year are a continuation of last year’s performance in two notable asset markets:

• China remains a major market disappointment – or a better description might be unmitigated disaster. The Hang Seng Index is down 10.2% YtD, and the (more local flavour) Shanghai Composite Index is down 4.8% YtD.

• US Treasuries aren’t finished with high volatility and losses in spite of the brief reprieve in 4Q2022, with the total return indices also sitting on losses YtD as yields creep higher.  The 10-year UST yield has risen 27bps already this year, with the 30-year total return index nursing a loss of 5.0% YtD. 

I suppose the good news is that US equities seem to have climbed out of their funk with a solid performance in the second half of this holiday-shortened week, led by none other than tech shares.  Isn’t AI a wonderful thing?  I’ll talk more about markets below, but first let’s take a quick look at what mattered last week.

WHAT HAPPENED THAT MATTERED?

While the elite business leaders and politicians were partying in Davos this week, plenty of economic data was released around the world that affected market sentiment.  #Bloomberg mentioned on Friday that as the week progressed, the combination of investors, bankers and company CEOs at Davos got increasingly positive, a vibe that certainly didn’t seem to be there at the beginning of the week.  Central bank officials from the ECB especially more or less showed their hand – or tried to – saying rate cuts weren’t on the cards until at least June.  Can they be believed?  Meanwhile, the Fed talking heads were popping up all over the place in the States singing from the same hymnbook.  “Higher for longer” remains the central Federal Reserve theme, although given the sharp rise in equities late in the week, you sometimes wonder if they are instead talking about the US equity markets. 

Away from Davos, economic data suggested that the US economy remains on solid ground, the UK is facing an ongoing bout of something that increasingly feels like stagflation and China’s economy remains in the dumps. 

US

Stateside, retail sales for December came in well above consensus expectations, showing that the engine of the US economy – the consumer – is continuing to spend, spend, spend.  Housing data was solid, and first time unemployment claims for the preceding week once again came in better than expected, suggesting that the US jobs market remains resiliant.  If that wasn’t enough to investor spur confidence in the US economy, the preliminary Michigan Consumer Confidence Survey for December, released Friday, showed a sharp increase in consumer confidence (+13.2%) in December.  Various Fed officials went out of their way last week to suggest that an early Fed Funds rate reduction and five or six such cuts during 2024 are aspirational at best.  Although the Fed walking back expectations of easing has been a major narrative all year, rattling risk markets, investors seemed to have finally taken it all in by mid-week.  Equities suddenly rediscovered their mojo, helped by solid economic data, and the S&P 500 ended the week at a record high.  The bond market was a different matter, taking it on the chin as yields skyrocketed mostly driven by the strong December retail sales and consumer confidence data.

UK

In the UK, inflation came in hotter than expected, followed by retail sales for December which were lower than expected, raising the twin threat of continued high inflation and stagnant economic growth.  I said last week that December can be a tricky month for interpreting data.  Recall that November retail sales in the UK were better-than-expected, so there is a case that December sales were poor because Christmas buying was “brought forward” to the Black Friday-Cyber Monday period (in late November).  I’m not sure I buy this, because it is clear that the UK consumer is flat on their back, very different than consumers in America.  The UK remains in the most precarious position economically.

China

China has been disappointing this year.  Starting the new year, I felt that Chinese stocks were hovering near their lows supported by cheap valuations, beaten down slowly throughout the year by the failure of the Chinese government to develop a game plan for their economy and to repair damaged and fragile company relationships.  However, this looks premature now as stocks have continued to head south, continuing last year’s slide.  In addition, it is clear that the country’s stock market has lost the support of the international investor community, as the velocity of investors bailing out is clearly gaining steam.  There is no doubt that Chinese stocks are dirt cheap, but increasingly, it looks like the stocks are getting just what they deserve. John Authers covered the issues facing China very well in his Thursday’s Points of Return column “The Thunder out of China is loss of Confidence”, worth a read if you are a #Bloomberg subscriber and are interested in China.  I will probably average down once more at these levels before throwing in the towel.

MARKETS

 Global equity markets were mixed this week, with US stocks leading gains and European bourses – along with China and emerging markets stocks – losing ground.  Japanese equities chalked up another week of gains, bringing their YtD run to 7.5% as the Nikkei 225 reaches record highs.  In the US, the AI narrative grabbed tech stocks again, as the tech sector led indices higher.  It all sounds so 2023!  The S&P 500 closed Friday at a record high, its best close in two years.  The story has been less good for small cap stocks, with the Russell 2000 losing ground on the week and giving back some of its late 2023 gains.  US Treasuries got hammered as mentioned above, thanks to solid economic data in the US.  The diverging fates of the US and European economies pushed the US Dollar higher against its index, and also against Sterling and the Euro.  The Japanese Yen also slumped, closing back above ¥148/US$1.00.  Gold came off its highs, and oil remains well bid supported by conflict in the Middle East. 

THE TABLES

The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes. 

Global equities

US equities

US Treasuries

Corporate bonds (credit)

Safe haven and other assets

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