Whats going on

A colleague and I have just spent two days at a Nasdaq investor conference, where we met with a varied selection of highly innovative companies in the technology space. What did we learn? Firstly, at no point did the possibility of recession cross anyone’s lips. We have not really had an economic recession since 2008. The Covid recession was so short-lived and was met with such a wall of financial support that it was over in a flash. Investors and CEOs have seemed to have forgotten that they happen, historically, about once every 6 years.

When one looks at many of these companies, one sees excellent innovation and can understand how they influence the industries they serve, bringing greater efficiencies and what Gen AI will mean for the economy in the years ahead. Then, one looks at how much of this opportunity is priced into these companies, which would appear to be quite a lot. The era of cheap money and, to be fair, the growth we have seen in the tech industry has got us accustomed to paying up for companies, which has, in turn, pushed up what we are prepared to pay for possibly less exciting companies, mainly talking about the US now. We all know how expensive the S&P 500 has been relative to history for a while now, and much of the rise in these stocks has been due to rerating expectations. When those expectations are not met comes the problem.

It was a busy couple of days for economic data, with much to unpick. Firstly, Thursday saw interest rate cuts from the Swiss Central Bank and the Bank of Canada, both by 50 basis points and the ECB by 25 basis points, accompanied by a more dovish tone to the statement from the ECB.

On Wednesday, the monthly US Consumer Price Index came in line with expectations at 2.7%. As a result, US inflation continues to run ahead of the Fed’s 2% target. This did not change the market expectations that the Fed would cut interest rates by another 25 basis points next week. Neither did the Producer Prices report, out yesterday, which exceeded expectations. We also had the weekly US jobless claims, which recorded a higher-than-expected number, possibly indicating further weakness in the labour market. Stubbornly high prices and weaker employment data, for a Fed with the dual mandate of 2% inflation and full employment, is a tricky mix.

This morning, we had a mass of UK data, including Manufacturing, GDP estimates and consumer confidence. It is probably fair to say the overall expected recovery from last month’s data did not happen. This is possibly further evidence of the effect government policy is having on the UK economy.  Weakness was driven by construction and production, while the dominant services sector stagnated. In other news STHREE, the recruitment company, slashed its earnings forecast yesterday, saying employers were still delaying hiring across Europe. The company specialises in science and technology recruitment.