Time for the crystal ball to be dusted down

The phrase bad economic news is good news for stocks held true again yesterday as another employment report, indicating further weakness in the jobs market came in below expectations. A further fall in ten-year US treasury yields, now offering just over 4%, having been closer to 5%, not so long ago helped spur on the “Magnificent 7” once again after a few days of pausing for breath. The S&P 500 is working hard to break through previous barriers from earlier in the year. Equity markets appear to remain entirely convinced that the US will avoid an economic recession, the Fed will start to cut interest rates and Goldilocks is back in town. The further kicker will be the drive for AI, which will indeed give legs for further gains in the technology sector.

Not only will AI boost those stocks we all have been following so closely, Nvidia and Microsoft, to name a couple, but it will drive further investment in many other areas of tech. Increasing the need for AI for cyber security, we will need to upgrade our phones and PCs, driving the next leg of the investment cycle.

Central bank’s balance sheets remain under scrutiny as Moody’s downgraded their outlook for China’s credit rating to negative. At present China’s rating remains A1 on the nation’s sovereign bonds. The news had little impact on Chinese capital markets as the yuan and government debt largely appeared to ignore the news.

Next week, the Fed meet for the final time in 2023, no matter what Powell says the market has convinced itself that we are now on the path to lower interest rates, possibly starting as early as March next year. Investor sentiment has gone from uber cautious to bringing next year on ASAP. Other central banks will follow, particularly in Europe, maybe less so in the UK.

We are likely to enter 2024 with almost the polar opposite view for the year ahead we had this time last year. As 2022 came to a close equity investors convinced themselves a recession was on the way, and bonds were the place to be. Yields, however, continued to rise as the economy remained far more resilient than expected. Not only did the Fed not cut rates as many expected during 2023 as the economy was expected to falter, they continued to tighten further. So-called experts could not have been more wrong; we shall see if they have better luck in 2024 guessing right.