We hope you are all extremely well and are enjoying the rich trappings that come with this time of year, dark afternoons, cold weather, rain, viruses and English rugby defeats. Admittedly, the final reference may warm the heart depending on from where you hail, but for this author it adds to the seasonal gloom. At least markets can keep us in good spirits following another decent month.

Turning to investments and 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.

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.

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.

Kind regards,

iPensions Wealth Team

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