Most focus last week was on the release of January PCE on Thursday (BEA release here) before the open, since this is the Fed’s much-watched preferred measure of inflation. The data came in spot on as anticipated, but investors were apparently braced for worse. As a result, sentiment shifted on a dime before the open on Thursday, pushing US equity futures – which were red – into positive territory. The momentum carried on throughout the session propelling the S&P 500 and the NASDAQ to record closing highs to end February, only for those records to be broken again on Friday as the week drew to a close. If you are keeping track, that’s 16 positive weeks out of the last 18 for the S&P 500, dating back to the beginning of November.
First time jobless claims in the US for the prior week, also released Thursday before the US open (DOL release here), showed a modest increase in unemployment claims although I have difficulty really understanding the data given the recurring revisions to prior weeks’ data. However, in a nutshell, first-time jobless claims were like PCE – coming in more or less as expected – certainly not a sufficient variation either way to matter much to investors. Although equity markets cheered the data, the US Treasury bond market first reacted with indifference, sliding sideways through much of Thursday’s session, before yields headed lower on Friday, providing an additional shot of adrenalin to US equities (as if they needed it).
Aside from the US news, economic data releases in Germany – the largest economy in the EU – included retail sales and CPI, both of which came in slightly below expectations, and unemployment, which came in slightly higher. Collectively, and largely indicative of the EU and the common currency bloc, Europe remains under pressure as growth slows, providing a growing argument for the ECB to begin easing its monetary policy sooner rather than later.
In Japan, inflation is continuing to slowly decline. Recall that GDP growth in Japan for both the third and fourth quarters was negative, albeit barely, and this – along with declining CPI and a booming equity market – gives the Bank of Japan the perfect backdrop to move towards a tightening cycle. I also suspect the weak Yen (above ¥150/US$1.00) is creating some angst among Japanese policy makers. With a negative overnight policy rate and YCC focused on the 10y Japanese government bond, the Bank of Japan – an outlier vis-à-vis other G7 economies – seems ready to begin bringing its monetary policy more in line with its peers.
Chinese manufacturing PMI came in below 50 for the fifth consecutive month in February, signalling an economic contraction and putting a damper on government efforts to boost the flailing Chinese stock market. However, as you can see below in the graph from #Reuters, services PMI remains slightly positive. Chinese equities still managed to eke out another week of modest gains, propelling the Shanghai index to the best performing global equity index tracked by #EMC for the month of February. Perhaps the week-long holiday for Chinese New Year in February will prove to have been a turning point.
I suppose I would be remiss not to mention the performance of benchmark cryptocurrency Bitcoin (BTC), which rallied like mad last week, very much in line with its traditional “feast or famine” price behaviour. It seems clear now that the approval and launch of several Bitcoin spot ETFs a few weeks ago, coupled with growing risk-on sentiment, has helped push the currency back towards the record high reached in November 2021 ($66,567 close Nov 8, 2021). Bitcoin closed the week at $62,441, up an amazing 23% WoW and adding to its remarkable 48% gain YtD.
MARKETS: END OF FEBRUARY
Rather than the usual weekly performance update, I thought my readers might be interested in recapping how various asset classes and indices have performed through the first two months of 2024. To add perspective in each case, I have included the performance of the index or asset over the prior three fiscal years (2021 to 2023).
US equities
The US equity indices that #EMC tracks have been positive YtD across the board, with the more tech-skewed NASDAQ Composite and the S&P 500 leading the charge. As you might recall, 2022 was a poor year for US (and global) equities. However, the gain in the S&P 500 since the beginning of 2021 has been 35.7%, an average annual growth rate of 10%/annum.
US Treasuries
The top of the table below shows the progression in yields since 2021 for the benchmark 2-, 10- and 30-year US Treasuries, along with the 2y-10y yield curve which first inverted in July 2022 and has remained inverted since then. Yields have risen sharply since last year as investors first realised and then accepted that rates in the US would probably indeed remain “higher for longer.” The bottom half of the table tells the story you would expect given the movement in yields. As attractive as UST Bills (less than 12 months) have been, intermediate and long-term US Treasuries have been poor performers over much of the period. Keep in mind that these are total returns, meaning that the returns consider both the change in prices and the interest received.
Corporate credit (USD BBB, USD & EUR high yield)
As you might expect, corporate credit total returns (bottom portion of chart) have been under pressure from higher underlying US Treasury yields. The correlation is close, but fortunately, corporate credit bonds – both investment grade and high yield – offer spread cushion, which ceteris paribus, provides some protection on the downside as yields increase. This is more true for high yield bonds than for investment grade. The middle of the table shows the much-monitored change in credit spreads, which is the price investors are charging for corporate credit risk. As the table illustrates, credit spreads have steadily declined since the beginning of 2022 even as the chatter about a pending recession reverberated throughout markets much of that year (and since).
Global equities
The story with global equities is fairly straight-forward in that US equity markets (discussed above) have been the shining star throughout much of the period, while Chinese equities have been the most disappointing. European equities have followed trend, and UK equities – as is often the case – have shown less volatility but have had the weakest performance overall aside from Chinese equities. Keep in mind that the composition of the FTSE 100 is rather unique (skewed towards energy, basic materials and financials), and it has a relatively higher dividend yield than most other equity indices (which is not accounted for in the index-only returns in the table below). The best performing market since the beginning of 2023 has been the Nikkei 225, as Japanese stocks found their footing and have marched steadily higher, finally eclipsing the former high for the index last achieved in 1989. The run YtD2024 for the Nikkei 225 has been truly remarkable. It remains to be seen if these levels can be sustained given the economic backdrop and expected monetary policy movements of the BoJ. Certainly, Japanese equities do not look expensive vis-à-vis US equities, so there could be some room to run.
Other assets
It would be hard to look at the table blow and not be amazed at the migration of benchmark cryptocurrency #Bitcoin, although you can also see the volatility in the still-nascent asset class. The US Dollar has remained firm, and probably has ongoing support given the expected trajectory of G7 economies and expectations for timing of central bank pivots in each country. Oil continues to lurk around the $80/bbl level, with little doubt that oil will remain a mainstay as far as energy supply for many years to come.
MY TRADES THIS WEEK
I finally got rid of two proverbial dogs I have held for many years: Kimberly-Clark (KMB) and McCormick (MKC). Here’s the story of KMB over the last five years, which has been going nowhere fast.
I have held KMB as a defensive position given its business, but enough is enough. I would have also thought a 23x P/E (TTM) and a juicy 4% dividend yield would have provided some protection for the stock, but the sad reality is that it has gone nowhere fast (or – rather painfully – slowly down).
As far as McCormick (MKC), the chart looks similar.
With a lower dividend yield that KMB and a slightly higher P/E (TTM), I again – after holding this stock more than 10 years – decided I had had enough and threw in the towel. I added some Novo Nordisk this week at below $120/sh, as I leg into this position slowly. I also did some short (covered) calls / long put trades on ABNB, a position that I am gradually working down, and did some income-generating trades with covered calls on AMZN (190) and MSFT (440). All of the options expire April 19, which puts me beyond the end of the UK tax year (April 5) should the shares need to be delivered.
In other activity, added some Novo Nordisk (NVO) this week, as I leg into this position slowly. I also did some short (covered) calls / long put trades on ABNB, a position that I am gradually working down, and did some income-generating trades by writing covered calls on AMZN (190) and MSFT (440). All of the options I was involved in this week expire April 19, which puts me beyond the end of the UK tax year (April 5) should the shares need to be delivered.
I am in no real rush to deploy my cash on hand into equities, but will look to add to some scraps to my existing positions if there are periods of weakness, should such periods ever occur again!
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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