Week Watch - 27 February 2024

Your 7-minute market update

Stock Take

After the 1929 Crash and Great Depression, it took Wall Street 25 years to recoup its losses. Last week, Japan’s Nikkei 225 Index broke that record as it finally surpassed its 1989 high.

In the intervening 34 years, Japan has struggled with deflation and little to no economic growth. It’s certainly not out of the woods yet – the economy unexpectedly slipped into recession at the end of 2023 – but corporate governance improvements and booming earnings, boosted by the weakness of the yen, encouraged foreign investors to pour $42 billion into the equity market last year.

The Nikkei has been on a blistering run, up around 17% so far this year and gaining 28% in 2023. The underperformance of the China and Hong Kong bourses has also drawn investors towards Japanese stocks.

The catalyst for the Nikkei’s record high was the bumper results and forecast announcement from NVIDIA, the world’s most valuable chip maker, which is leading the artificial intelligence (AI) revolution. The tech giant’s record sales saw revenues surge by 265% in the three months to the end of January, while turnover for the full year doubled to $60.9 billion. The company forecast astonishing first-quarter revenue growth of 233%, as its chief executive Jensen Huang declared that generative AI had “hit a tipping point”.

Other markets joined the party. In the US, the S&P 500 surpassed its record high set last week, as other tech giants including Amazon and Microsoft also made gains, while the Stoxx Europe 600 also beat its previous peak.

The S&P 500 has gained more than 7% so far this year, and NVIDIA has been responsible for a quarter of that return. The narrow leadership in the recent gains has sparked concerns that excessive exuberance over the AI theme has left some stocks and indices approaching ‘bubble’ territory, especially given the challenging economic backdrop.

The recent rally has inevitably drawn comparisons with the tech-driven gains of the late 1990s, but there are important differences. Most notably, the meteoric gains back then were in unprofitable dot-com companies which had exciting growth prospects but no sustainable earnings base. NVIDIA, Microsoft, Alphabet, Amazon, and Meta generated a quarter of a trillion dollars in earnings in 2023.

After a bumper set of economic data the previous week, investors had little news to chew over before NVIDIA’s midweek announcement, and trading was quiet at the start of the week due to midterm school breaks and a Wall Street holiday on Monday.

China announced the biggest ever cut in its benchmark mortgage rate in a bid to revive the country’s ailing property market. Yet commentators suggested homebuyers are less concerned about high mortgage costs than by the risk of developers going bust and house prices falling. While the move signalled a determination by authorities to support the market, investors are waiting for more substantial measures to boost consumption and put a floor under property prices.

More positively, official data showed that tourism spending over the Lunar New Year break jumped above pre-Covid levels and was up 47% compared to the same holiday period last year. The holiday is known as the world’s largest annual migration, as Chinese people reunite with their family members or visit tourist attractions. 474 million domestic trips were taken, including more than 61 million train journeys.

Bank of England governor Andrew Bailey told a committee of MPs that the UK’s recession may already be over, adding that, by historical standards, “this is the weakest recession by a long way.” But Bailey reiterated that an imminent interest rate cut was unlikely, and that the Bank needed further evidence in areas such as wage growth and the number of job vacancies to show that inflation had decisively turned.

The European Central Bank (ECB) reported slowing wage growth across the euro area in the final quarter of last year. The ECB has singled out wages as the biggest risk in its battle to tame inflation. Inflation came down rapidly last year and now stands just below 3%, but the ECB said it could take over a year to get it down to its 2% target, despite a record number of interest rate hikes and sluggish economic growth.

Meanwhile, the Bundesbank said that Germany is also likely in recession now. Germany’s industry-heavy economy, the biggest in Europe, has struggled with the perfect storm of high energy costs, weak Chinese demand, and rapid inflation. Those concerns were underlined when the German government slashed its own forecasts for economic growth this year to 0.2% from its previously forecasted 1.3%. Despite such gloom, the German DAX Index also closed the week at a record high.

Wealth Check

Even the most level-headed investor can find themselves swept up in the inevitable ups and downs of markets. Understanding the psychology that underpins our investing patterns can help take the emotion out of money and lead to better decisions.

Part of the explanation for why we feel the way we do about our finances comes down to evolution. Our brains are well-adapted to respond to the threats we faced hundreds of thousands of years ago. Survival often depended on immediate physical or physiological responses to sudden changes in our situation – the so called ‘fight or flight responses’. However, we now live in a different era, and those same instincts that kept us alive millennia ago may lead to poor decisions today.

Behavioural finance expert Dr Daniel Crosby describes it as asking a 150,000-year-old brain to navigate 400-year-old financial markets. Crosby identifies four common ‘mistakes’ or biases that can compromise our thought processes: overconfidence or ego, emotion, attention, and conservatism.

In investing, overconfidence can lead people to overestimate their understanding of the stock market or specific investments. Emotional states can dramatically influence how we perceive and affect our ability to judge risk against reward. Reacting or overreacting to short-term noise is what psychologists call ‘attention’. We may focus too much on what’s happening in our immediate present and lose sight of our long-term goals. Playing it too safe could lead to avoiding less familiar investment options and taking less investment risk than necessary.

All investments carry a degree of risk, and understanding your own attitude towards risk is a fundamental part of financial planning. Financial advisers and professional fund managers have a significant advantage – they’re trained to understand the impact of our natural biases and can work to mitigate risks. Part of that risk management involves spreading your investments across a wide range of expertly managed funds, rather than heavily investing in just a few options.

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In The Picture

Our Investment Research Director, Joe Wiggins, aptly compares targeting long-term growth while obsessing over daily market fluctuations to starting a diet and filling your kitchen with chocolate. Watch the whole interview here.

The Last Word

“The vehicle is stable, near or at our intended landing site. We do have communications with the lander.”

Stephen Altemus, CEO of Intuitive Machines, reveals the company’s moon lander, Odysseus, is ‘alive and well’ after landing on its side, marking the first private spacecraft ever to land on the moon.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

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? S&P Dow Jones LLC 2024; all rights reserved

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SJP Approved 26/02/2024