February 2024 MPS Market Review

• It will have been hard to miss the major market story in February, but if you did, given the likely step up in noise, it’ll be even harder to miss it next quarter!
• I am, of course, referring to Nvidia’s results day, which overnight seems to have become the biggest event in the financial calendar, supplanting inflation, jobs and central bank policy announcements.
• Fortunately for markets the earnings release far outstripped expectations, propelling investor sentiment higher, particularly toward US Tech stocks and, obviously, Nvidia itself.
• Indeed, on the day of trading post release, Nvidia recorded the largest-ever one-day jump for a single company’s market capitalisation, a staggering $272 billion was added. For your interest, this record tossed Meta into second place, having recorded a single day market cap jump of a mere $205 billion just a few weeks earlier.
• For those now expecting some insight on what next for Nvidia and its Magnificent 7 cohort, I’m afraid this author will come up some way shy. I would, however, encourage you to listen to an excellent podcast, covering this very subject, with one of Invesco’s Global Equity Fund Managers. It was released on Thursday 29^th February and here is the link A.I. Stocks with Joe Dowling.
• Moving beyond this dominant theme, and we note the combination of impressive economic data and stubborn inflationary prints has encouraged more hawkish communications from central banks, particularly from the all-important US Federal Reserve.
• In response, the market has revised lower the number of anticipated interest rate cuts for the year ahead.
• Such hawkish adjustments are manifest in a move higher in bond yields and a move lower in bond prices.
• These dynamics often prove a headwind to stock markets as higher bond yields drive up borrowing costs for consumers and businesses, weighing on growth expectations. Higher bond yields also increase the ‘discounting factor’ in converting future cash flows into a present value and, therefore, can often pull the value of a business lower.
• Markets, or at least US stocks, have powered through this headwind, however, with the earnings power of its largest components swatting aside the pesky issue of higher bond yields.
• Of additional relief to markets, given the particularly impressive jobs data, is the reduced probability of an imminent recession.
• Markets may also be encouraged by the reduced probability of resurgent inflation by a more disciplined approach from central banks.
• With labour markets still in such good health, a swift series of interest rate cuts might enthuse consumption to such an extent that demand and inflationary pressures reemerge.
• In such circumstances, the central bank would be compelled to take interest rates yet higher, determined to deliver a more punishing recession, and more firmly see off the inflation menace. This would likely be a very unpleasant outcome for stock markets.
• Short-term frustrations derived from hawkishness may have given way, therefore, to optimism of a more durable recovery.
• Beyond these ‘grand visions’, we would also suggest nearer-term forces retain a positive leaning.
• Primarily, whilst we acknowledge inflationary prints are not falling in a straight line, the trend still looks encouraging, and does suggest interest rate hikes are likely in the rear mirror.
• As we have mentioned several times, growth is also proving far more resilient than anticipated.
• This ‘Goldilocks’ combination has historically been a favourable one for equities, and largely instructs our modest positive bias within the current investment strategy.
• It is important to stress, however, there are non-negligible risks to this view.
• Whilst there is good reason to believe healing supply chains, housing market weakness and cracks in the labour market can prolong the disinflationary trend, hopes growth can remain positive throughout 2024 may yet be a step too far.
• No doubt the market has been surprised by the resilience of the economy to prior interest rate hikes, but the ‘long and variable lags’ to policy changes should remain front of mind.
• Whilst certain mortgage deals may allow segments of the economy to avoid the full force of interest rate hikes, not every consumer will be in such a fortuitous position.
• What is more, many channels of financing, such as credit cards, overdrafts and corporate lending will be much more sensitive to interest rate changes and will continue to bite into the economy as we move through 2024.
• Geopolitical challenges which threaten shipping lanes is evidently a worrying development too. Such forces drive input costs higher leaving business with the choice of raising prices or cutting margins.
• Should these challenges expand then stock markets will be left to deal with a drop in earnings or a return of inflation; neither of which are generally received well by markets.
• Investors should brace themselves for a more volatile period ahead, as markets fret between extremes of soft-landing euphoria, inflation resurgence and recession.
• Yet, even in recession, we would argue all may not be lost for equity investors. Of most comfort would be the hope any such recession wouldn’t be as severe as more recent episodes.
• This more benign view hinges upon the apparent absence of major economic imbalances i.e. corporations and households don’t (in aggregate) appear to be facing quite such daunting refinancings challenges (except maybe UK mortgage holders) as in prior economic cycles.
• We should also remind ourselves that having moved off the zero bound, there are now some interest rates to cut! Such policy options might prevent a more pernicious downturn and prove sufficient to reignite economic and investor enthusiasm.
• Recognising how uncertain the outlook remains, however, as well as our philosophical belief in the need for humility when investing, MPS portfolios strive to seek appropriate levels of diversification to meet the investment challenges ahead.
• Relative to stocks for example, high quality corporate and government bonds might offer a more defensive return profile in the face of less encouraging growth outcomes, particularly given the increase in yields observed over recent months.
• Alternative asset classes also assist Invesco in its efforts to help diversify portfolios in a more troubling period for stock markets.
• Stay safe, stay well, and please get in touch if you wish to discuss any part of the Invesco MPS strategy further.

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