The InvestSense Podcast

Markets were again on the back foot last week. However, despite a fair amount of volatility, most markets were flat or only down by 1% or so.

Markets think ‘we’re there’ in the global fight against inflation – but are we? Last week the RBA also proclaimed confidently that local inflation had peaked, so you might think it’s all downhill from here....

Markets ended up a few percent last week, but only after a mid-week earnings scare triggered by a flat result and weak guidance from Microsoft.

As the world’s elite gathered in a snowless Davos, markets focused on much more immediate concerns, starting with the continuing wave of layoffs in corporate America. Amazon, Microsoft, Alphabet (Google’s parent company), Salesforce and Goldman Sachs, among others, took turns to announce staff cuts. It would appear boardrooms and CEOs are lending some credence to the possibility of a recession in 2023.

During the last few weeks, the prospect of rising interest rate expectations continued to grip markets, as the soft landing/rapid disinflation thesis was tested. Tight labour markets in the US have firmed the case for tighter monetary policy and in that sense, it was perhaps not surprising to see a continuation of the dominant trends of 2022 where interest-rate-sensitive tech stocks took the brunt of the selling while value and ex-US stocks were more resilient.

Uncertainty stalked markets last week amidst a raft of rate hikes, but the focus on inflation shifted from the US – where the news was ostensibly quite good – towards Europe, where inflation pressures continue unabated.

Most markets were soft but stable last week while US markets were down a more significant 3%, led by the large US tech stocks.

Volatility crept back into markets, especially in the US, last week as China’s COVID woes weighed on markets early in the week before the S&P 500 rose by 3% in a few hours after US Fed chair Jerome Powell intimated that the rate of interest rate hikes might at least slow down from here.

A quiet black Friday in the shops perhaps pleases the Fed more than the retailers...

Fed officials sought to impress upon markets the notion that it would take more than one apparently weaker inflation print and an impending recession to pause this US rate hiking cycle. Headlines like “Housing industry braces for a downturn, but investors are piling in” neatly summarise the tone of a market where both the rate cycle and resultant recession has been so well telegraphed. The fact that both are so well priced in by markets means that any incrementally better (or at least less bad) news can cause markets to rebound sharply with particularly beaten down stocks or sectors jumping by the most.