Bull Market Remains High

Market Overview:

After a couple of flattish weeks, equities regained momentum and the bull market rumbled higher. New highs were achieved in the US, Japan and Europe and even the FTSE 100 is closing in on the 8000 level it achieved in February of last year. Investors had probably been bracing themselves for hawkish news from the Fed and the BOE, but to the surprise of many we got a dovish tilt from the BOE and a Fed Chairman seemingly unconcerned by recent higher inflation prints. Japan finally moved off negative rates in a move that came earlier than anticipated, but this move was taken in stride by the market. Bonds also liked the dovish tone as yields fell across the board and Gold and Oil finished broadly flat.

FOMC Update

There was a lot going on last week, so I will dive straight into the main event, the meeting of the Federal Reserve Open Market Committee. There was much concern that recent higher than expected inflation numbers would alter the expected course of rate cuts, with the attention focussed on the ‘dot plot’ projections. These are where the 19 FOMC members each give their predictions for the level of future interest rates and economic numbers in the form of a dot. At the median level of the dots, that is where the Fed suggests the most likely path of interest rates will be. Although, the outliers are mainly higher, following this meeting it still looks as if we will get 3 cuts by year end, with 3 more in 2025 and 2026. That came as a big relief to investors who had been expecting a move to only two this year and we saw the odds of a rate cut in June move from around 50% to nearer 70%. Bond yields dropped and equity markets snapped higher. 

That wasn’t the end of the good news as the committee also boosted the economic growth forecast, with GDP set to be up to 2.1% for the year up from 1.4% and they also lowered their unemployment rate projection slightly, to 4% from 4.1%, for 2024.

After the numbers we got to hear J Powells views and to see if there were any further clues that could be ascertained on the likely direction of monetary policy. Powell had plenty of opportunity to express concern about recent inflation data, but he seemed to gloss over the numbers by merely suggesting the path to 2% would be likely to be bumpy. Equally he could have expressed concern at the buoyancy of the equity markets, but here too he passed on the chance, suggesting that financial conditions remined restrictive. So, all in all, it would appear that for the moment, the Fed are willing to let the economy and stock markets run hot, with less concern about inflation and it does look as if they want to squeeze in a rate cut in June. I can understand the positive reaction from the equity markets, but I wonder if bond investors might not go away and decide to take a less favourable view on events last week.

Much could have gone wrong last week, but in the end it could not have worked our better. From small-caps to industrial shares, all major US equity indexes climbed and even the hyped Nvidia conference did not disappoint. Shares of the chipmaker advanced for a record 11th straight week as Chief Executive Officer Jensen Huang unveiled a new processor design called Blackwell, which as I accurately predicted is indeed going to make everything work much, much faster!

BOE Update

Good news, the Bank of England is moving closer to reducing interest rates with it increasingly looking as if this will come in June. Two key members, who previously advocated for rate increases, have now aligned with the majority in maintaining the current rate at a 16-year peak of 5.25%. This shift marks a significant change since September 2021, when the committee unanimously opted against raising rates.

This dovish shift doesn’t come out of the blue as inflation data has actually been coming in weaker in the UK, with economists now predicting that the Consumer Prices Index could soon fall below the bank’s 2% target when energy prices drop as forecast in April. Data on Wednesday showed inflation falling to a 30-month low of 3.4% in February, with services inflation cooling to 6.1% in line with the BOE’s forecasts. Last week jobs data also showed unemployment rising for the first time since last summer and wage growth edging lower.

Falling rates are only one piece of the jigsaw puzzle that could solve the conundrum of our lagging UK equity market, but arguably the more important piece is the growth part of the equation and here we got signs of life from the economy. Britain’s private sector firms continued to report output growth, adding to evidence that a rebound from last year’s recession is underway. S&P Global said its composite purchasing managers’ index registered 52.9 in March, above the crucial threshold of 50, signalling growth for a fifth month. While services providers posted a drop in confidence, optimism in the manufacturing sector hit the highest since April 2023. Businesses are expecting higher sales over the year thanks to improving consumer confidence, tax cuts, easing inflation and the prospect of rate cuts in 2024. Retail sales also came in slightly better than expected for February, albeit flat!

Now forgive me if I may seem to be clutching at very short-term straws here, but under the radar and very much in the shadow of other global equity markets that are attaining new highs, the UK has snuck in a little burst of outperformance this month. The UK market is cheap and universally disliked, my own 8AM team are exasperated by our UK weightings in our AQ models, but the contrarian in me can’t help but think that the UK might finally be about to deliver some relative outperformance. Its not just a hunch, the smart corporate money has spotted the opportunity (a catalyst I have been waiting for) and takeover deals are starting to come in thick and fast, with premiums being commanded.

Part of the problem with the FTSE 100 lies in the constituents as instead of a meaningful tech weighting, we are overweight resources, but there are signs of life in the Copper price which is a good early indicator of a recovery in global economic activity. If our mining stocks start motoring and if the FTSE 100 can bring itself to poke its head back above the 8,000 level and then break to new highs, it may capture the attention of global investors who are very underweight the UK. We shall see, but I think with much of the world already at all time highs, there will be many looking around for the next hot market. Lets hope so.

Japan

Not even the first interest rate increase for the first time since 2007 has slowed the record-breaking surge in the Nikkei. Signs of the final end of deflation are driving investors to bet ever more on Japan’s economic growth, while a weakening yen continues to boost exporters. The official push on companies to improve shareholder returns is improving the equity culture for both domestic and overseas investors and the record high will attract newcomers to the market. Despite the recent surge in the index, to put it in to context , the valuation of the market still looks attractive when compared to the US. No wonder, Japan was the favourite Asian market for investment in a recent Bank of America survey. Rarely do we see the unusual combination of both overseas investors and domestic individuals  positive and committing cash to the Japanese market.

Even rate increases are unlikely to rock the boat too much, as the move is small and will likely have only limited impact in Japan, as companies and households have solid balance sheets, and the government has strong financial flexibility. In fact the cause of the move – the fact that Japanese companies are increasing wages – is broadly positive, as it will increase people’s purchasing power and that will greatly benefit domestic demand companies. Perhaps we may see Japanese Small Caps now pick up the baton from the large caps, either way we have above exposure within the AQ portfolios.

It would seem that the outlook for the global economy and equity markets is as rosy as it has been for a long time. Certainly the tone of investors is bullish, with the latest AAII (American Individual Investors) sentiment survey confirming more than 43% are of a positive disposition. Although it has been higher recently and the number of bears is creeping up, suggesting we are not in euphoric melt up. So what could possibly go wrong from here? I think it would be wise to keep an eye on the Oil price which has been creeping up and a meaningful shift higher could perhaps reignite inflation. And of course we have the possibility of Trump in the Whitehouse, which is a complete wild card for markets. But for the moment, it looks as if the trend is higher and I would love to see the FTSE 100 set a new high next week.