No body cares till they do

The year is starting rather as it ended 2024, generally with the US economy appearing to be resilient and the market becoming less convinced that interest rates in the US are coming down again anytime soon. The latest monthly ISM services index came in at 54.1, ahead of expectations and indicating an expanding service sector, in contrast to manufacturing sectors which continue to be weak. The S&P 500 had a weak end to the year and is having a mixed start to 2025; bond investors are not doing so well either; the 2 year US treasury yield is back up to 4.3%. This Friday economists and investors will get a look at December hiring and employment data, the next data point for the market to focus on. At present resilient growth in economic activity, plenty of available jobs, a recipe for potential inflation remaining stubborn reducing the likely action by the Fed in the foreseeable future. On top of all this you have an incoming president presenting a confusing picture, of how he views the world. Chinese equities have another poor start to the year as they wait to see Trumps tariff wars play out.

In contrast, the UK monthly composite S&P PMI came at 50.4, below November’s 50.5 and below expectations, continuing to indicate that the economy is continuing to stagger along. Next week, we get the monthly inflation data, CPI is expected to remain at 2.6%, but the risks remain it could rise further in the coming months. Who would be a central banker at present.

Possibly the easiest tsk is for the ECB as, despite a modest jump in inflation in December to 2.4%, this will not preclude another cut of 25 basis points in the near future.

As I look to the year ahead, its arguments for caution remain clear, for US equities at least. Stocks are close to the most overvalued against corporate credit and Treasuries in about two decades. The current S&P 500 earnings yield stands at 3.7%, the lowest compared with Treasuries since 2002. John Arthurs writing his Bloomberg piece, highlights the excessive price to sales ratio US equities are on. On the other hand the narrowness of the rally may well provide opportunities elsewhere.  The tech sector currently trades on almost 10x times price to sales, compared with 2-3 X historically, and just over 6X at the height of the dot com boom. What bursts the bubble? Dare I use that word; it’s hard to tell. I remember 1987 so well, the same thing: stocks rising, yields rising, stocks looking more and more expensive relative to bonds, no one cared, and then one day they did.