Market Musings 120223:
Time to cool down after a hot start

Consolidation to be expected after a strong start, negative seasonality for the rest of February.

Summary

  • US Soft/no landing narrative gains traction

  • Short-term interest rates rise, pricing risk of higher central bank rates

  • Higher rates put a brake on the stock market rally, for now

  • European stocks remain cheap and unloved

  • But European Q4 2022 company results have generally been positive

  • Remember that over the long term, mid-caps in US, UK and Europe outperform large-caps, by far

Podcast: Our investment strategy for February 2023

  1. How is the decarbonisation of the economy going?

  2. How are we financing the energy transition?

  3. Efficiency is the name of the game.

  4. What is a good way to invest in the energy transition?

US Soft/no landing narrative gains traction

Markets are giving increasing credibility to the potential for the US economy to escape economic recession in 2023 - a so-called soft or no landing scenario. The strength of the US employment market (an incredibly strong January non-farm payroll report and a sharp rebound in the ISM Services PMI survey for January to growth) has given some credence to this possibility.

January US ISM Services PMI survey - sharp rebound

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Source: ISM

But at the moment, good news for the US economy can be bad news for stock and bond markets, as unexpected economic strength could prompt the US Federal Reserve to raise interest rates by more than expected in order to ensure that inflation rates return to more comfortable levels over the remainder of this year.

This prospect has been reflected in sharply higher short-term bond yields as the bond market discounts the risk of a higher peak Fed Funds rate than the 5% expected in the next few months.

US 2-year bond yield breaks recent downtrend, rebounds to 4.5%

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Source: tradingview.com

Higher interest rates are bad for not only bonds but stocks, as investors have the potential to invest their savings in even higher risk-free (or nearly risk-free) interest rates, reducing the appeal of stocks. In addition, higher interest rates bizarrely raise the risk of an eventual economic recession! So…

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