The State of Markets: More Record Highs

The week ended with another day of gains in the key US S&P500 and NDX100 equity indices and record highs on both markets. For the week, the S&P500 was +1.0%, the NDX100 +3.1% and the Philly SOX +2.7% (although, despite Friday’s strength, the SOX remains just below its 200-day moving average trend line). That strength, though, wasn’t replicated across all the main US equity indices, as leadership rotated. With that, the DJ Transportation index, the DJ Industrial Average, and the small & mid cap US indices were all down on the week (mostly by 0.5% to 1.5%; NB the transportation index was the exception falling by 4.2% last week).

European markets were key outperformers with the Italian, French, German and Swedish markets all 2.5% – 4% higher last week. After peaking on Monday, EZ bond spreads over German yields (i.e. country specific political risk) eased throughout the rest of the week (driving equities higher). French spreads, for example, closed at 88bps on Monday, then eased off to close on Friday at 77bps – see key chart below. Portuguese spreads closed the week at 39bps (their lowest since 2008).

Our latest views on the 1 – 4 month outlook for US equities is laid out in this week’s ‘Tactical Equity Asset Allocation’ publication – available below for subscribers (or for a trial click: https://www.longvieweconomics.com/individual-subscriber).

Looking ahead, this week is packed with monetary policy decisions with the RBA (Tuesday), the Bank of Canada (Wednesday), the ECB and SNB (Thursday) all holding meetings. China’s Economic Work Conference is also being held this week (Wednesday–Thursday). An announcement on fiscal stimulus is expected. Key macro data includes US headline and core CPI (Wednesday), Chinese CPI & PPI (Monday), and Chinese monthly lending data (Friday). On the corporate side, earnings reports from Oracle (Monday), Adobe (Wednesday), Broadcom and Costco (Thursday) will be in focus. For full details, see below.

Key chart: Various EZ 10-year government bond spreads over German Bund yields (bps)

Upcoming important data/events this week:

Key Research

Longview on Friday, 6^th December 2024:

“What’s the Message of the Bond Market? Why is it Different from Equities?”

“Prices “will be stickier for longer” and market expectations for Federal Reserve easing may be “overdone,” she added.”

Source: “BlackRock’s Kate Moore Sees ‘Sticky’ Inflation, Market Volatility Ahead”, 21^st November 2024, speaking at the annual University of Virginia Investing Conference; https://news.darden.virginia.edu/2024/11/21/blackrocks-kate-moore-sees-sticky-inflation-market-volatility-ahead/

It’s a popular mantra at the moment: ‘Inflation is going to be sticky’ (as Kate Moore alludes to in the above quote). It’s come down a long way from its 9% peak in 2022 but will struggle to fall further. That’s the general view on much of Wall Street, as the parallels with the 1970s are widely touted (along with the chart showing the reacceleration of inflation before it got below 2% in 1973 and 1977 - see FIG 14 in appendix). That, though, is lazy thinking. As we laid out in our Longview Letter No. 137 – ‘Is This The 1970s? Really? A.k.a. We’re all Monetarists now’ in May 2022 – see HERE, the parallels with the 1970s are limited. And the differences multiple. Money supply growth, for example, never slowed below 5% annual growth in the 1970s (while last year it was -2.7%). The 1970s also included several phases of price controls; while the Fed itself didn’t believe it could control inflation with monetary policy.

Key North American macro data & events:

Fig B: US headline & core CPI (Y-o-Y%)

Key European macro data & events

Fig C: Eurozone industrial production (Y-o-Y %)

Key UK macro data & events

Fig D: UK RICS house price balance (index)

Key Asia-Pacific macro data & events

Fig E: Japanese Tankan manufacturers & non-manufacturers quarterly survey

Last week:

Longview on Friday, 6^th December 2024:

“What’s the Message of the Bond Market? Why is it Different from Equities?” 

Tactical Equity Asset Allocation No. 251, 4^th December 2024:

“This Bull Run (since Oct ’22) is Tiring! A.k.a. But Stay Tactically OW (for now)” 

Prior week:

Longview on Friday, 29^th November 2024:

“Overweight & Nervous -> Complacency Abounds”

Global Asset Allocation Alert (Strategic), 28^th November 2024:

“Move NEUTRAL (from OW) High Yield Credit in Strategic Portfolio” 

Global Macro Report, 26^th November 2024:

“UK Inflation: ‘Tending Down’ or ‘Sticky’?”