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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • Writer's picturetim@emorningcoffee.com

Week ended May 26, 2023: Feeling fragile


Cracks are continuing to appear here and there as far as investor sentiment. Nonetheless, as fragile as risk markets might feel at times (certainly that’s my sense), they continue to show remarkable resiliency. Even with the messy US debt ceiling situation now staring us in the face, equity investors continue to experience joy as they rack up solid gains, with Japanese equities (Nikkei 225 +18.5% YtD) and US tech names (NASDAQ +24.0% YtD) leading the charge. Gains in equities, coupled with the ability to shake off pending crises one after another, must make investors sitting in cash cringe as they watch stocks head higher. The dilemma for these investors is whether or not to wait it out, on the basis that a “big revaluation” is just around the corner, or to capitulate and jump on the rapidly moving train.


It’s a very tough call at the moment. To find oneself in cash during this rally is the very reason that I tell my readers – and my children and anyone else that will listen – to get invested and to remain invested over time. Naturally, you need to be mentally prepared for the ups and downs of owning stocks, but you should also be fully confident that – in the long run – equities go up. (And as an aside, diversification to include other asset classes should also be a key component of your portfolio.)


As far as my own portfolio, I have put in place a series of rolling stop-losses on a portion of my larger tech positions (e.g. AAPL, GOOG, AMZN), adjusting the stop price as the shares move higher. And I have also lightened or completely exited some names that I think have gotten ahead of themselves at recent or current valuation metrics, namely LLY and NVDA. I hated reducing my holdings in both companies, but common sense prevailed, or so I think. Admittedly, much of my current stock portfolio aside from large tech names is comprised of “boring” defensive companies, skewed towards dividend generation. Unfortunately, these are some of the very stocks that have been out of vogue as tech-related names (or any company that mentions the magic acronym “AI”) sail to the moon, but the combination of sector and dividend yield provide downside protection whilst I stay long stocks. (If you are interested, I provided some commentary on the general composition of my portfolio in a February 2023 article in EMC that you can find here.)


WHAT HAPPENED THIS WEEK THAT MATTERED

The news that was influential as far as financial markets this week included:

  • UK inflation, remains way too hot; the April CPI read caused Gilts to tank after its release as yields gapped up to “Liz Truss levels”

  • US debt ceiling discussions and the potential that Fitch might downgrade the US, and

  • Earnings, focus on Nvidia.

Of course, the debt ceiling debacle has everyone’s focus at the moment, and Fitch has now jumped into the fray by putting the US’s AAA rating on its “Rating Watch Negative” list (see here). Like every investor, I would like to see this resolved so we can move on to other concerns, although I must admit that I wonder at times what would happen if the US did in fact run out of money and default on its debt.


That dark thought aside, Nvidia provided the second-most amount of excitement this week, serving up an amazing round of quarterly earnings (1Q24, see earnings release here) and bringing joy to the holders of the shares (up 24.4% on day after earnings). The numbers were solid any way you slice them, almost so good in fact that it makes you wonder how analysts could miss so badly. I could go on and on about Nvidia, but I will spare you this diatribe and leave you with a question to ponder. Even with Nvidia’s amazing progression across many of its key markets – and as a company firmly positioned to benefit from AI – does the current valuation of the stock make any sense at all? To me, it simply doesn’t. I hated giving up on NVDA and will probably regret it because this is a damn good company at the end of the day even though the shares have taken on “meme-like” characteristics for the time being.


As far as UK inflation, the higher-than-expected results (ONS report here) clobbered both Gilts and UK equities this week. The only market reaction I cannot fully understand is how Sterling is remaining so relatively resilient. Yes, I do realise that the Bank of England will likely have to continue raising its Bank Rate to address stubbornly high inflation and that this perhaps underpins Sterling, but I have a hard time getting excited about future economic growth in the UK vis-à-vis that of other developed countries. It is these feelings that override the relative direction of central bank interest rate increases / decreases for me. Adding fuel to the fire, I suspect the UK economy will continue to be a severe laggard not only because of tight monetary policy, but also because of the ongoing after-shocks of leaving the common market.


MARKETS THIS WEEK
  • Stateside, NVDA was the driver of equities in the second half of the week, stopping a slow grind lower in US stocks in the first three days of the week. NVDA accounted directly for nearly all of the gains in the S&P 500 and the NASDAQ on Thursday, and then arguably was the catalyst for a broadening rally on Friday as most US indices clawed back their losses for the week. As we head into the long weekend (Memorial Day on Monday in US, markets closed), US stocks ended the week with a bang, pushing most indices into gains WoW.

  • Most global equity indices were lower on the week, with the exception of the S&P 500 (and NASDAQ) in the US and – of course – the Nikkei 225, which is continuing to push higher.

  • The US Treasury yield curve (2y-10y) steepened, as yields at the short-end of the curve widened sharply because of the pending “x-date”, the date when the US will run out of money and lacks the authority to borrow more. It was announced yesterday that the x-date has likely moved out to June 5. That’s great news (sarcasm) because now politicians can spend four more days wasting time and money as they try to get this mess sorted.

  • Corporate credit spreads were better on the week, continuing to suggest there is little stress so far in global credit markets. Gold was slightly lower, and the US Dollar has continued its resurgence as it broached the $104/DXY level, its highest level since early March. Oil prices were also slightly higher on the week.


THE TABLES

Global equities


US equities


US Treasuries


Corporate bonds (credit)



Safe haven and other assets


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