For investors, it is not easy staying focused these days on the substantive economic and business data that matter for your portfolio. Putting aside the constant noise coming from the new administration, a few trends look to be emerging early in Mr Trump’s post-inauguration period:
The Mag 7 is starting to revert to the mean as the performance of this elite group of stocks is converging with the market at large. In 2024, the equal-weighted S&P 500 index returned 10.9%, with the market-weighted S&P 500 – concentrated in the Mag 7 stocks (circa 34% of index) – returned 23.3%. This year has been a very different story so far, as the equal-weighted S&P 500 has returned 2.4% and the benchmark S&P 500 index – still dominated by the Mag 7 – has returned only 2.2%.
The “Trump trade” halo has come off:
Small/mid cap stocks have faded after a strong start, with the Russell 2000 now down 9.8% from its post-election high on November 29th,
US equities are now lagging behind as far as returns YtD compared to several foreign exchanges, including stocks in the UK (FTSE 100), in broader Europe (STOXX 600) and in the emerging markets (MSCI EM),
Oil has been range-bound since coming off its mid-January highs, with WTI settling in the range of $70/bbl to $72/bbl,
The US Dollar has weakened back to where it was before Mr Trump was elected, and
Bitcoin is well off of its post-election highs.
Gold – the ultimate “risk off” asset – has continued to rally, hitting record high after record high. This might be attributed to technical factors as some suggest, or it could be that investors are seeking a core safe haven asset in increasingly uncertain times.
As mentioned already several foreign stock markets have outperformed the S&P 500, suggesting perhaps that the “American exceptionalism” trade is fading, at least as far as global equities. The graph below is from #Bloomberg, comparing the returns on US and European equities since 2014.
Yields in the bond market have slowly decreased. Intermediate and longer-term bonds are torn between higher potential inflation for longer (higher yields) and slower economic growth in the coming quarters (lower yields), either of which could occur depending on the fiscal policies of the president and Congress. At the moment, certainly based on some weaker-than-expected economic data released Friday, the risks of an economic slowdown seem to have the upper hand.
Inflation remains stuck, and the Fed remains steadfast in its mission to address the “last mile” of inflation, returning it to the 2% target. Don’t expect rate cuts anytime soon, unless the US economy starts to stall.
US equities faded in the second half of the week and bonds rallied, most pronounced on Friday. US stocks were the worst performer of the equity indices EMC tracks last week, while emerging markets equities were the best. UK, European and emerging market stocks have all far outperformed US stocks YtD. Bond yields have settled, with concerns about a slowing US (and global) economy gaining the upper hand for now. See tables in Market section below.
WHAT MATTERED LAST WEEK
The FOMC minutes (here) were released mid-week, providing more colour on the last FOMC meeting in January. Below is an extract from the section “Committee Policy Actions” that largely sums up the reason that the Fed kept its policy rate on hold and remains cautious going forward:
“In their discussions of monetary policy for this meeting, members agreed that recent indicators suggested that economic activity had continued to expand at a solid pace. The unemployment rate had stabilized at a low level in recent months and labor market conditions had remained solid. Members concurred that inflation remained somewhat elevated. Almost all members agreed that the risks to achieving the Committee's employment and inflation goals were roughly in balance. Members viewed the economic outlook as uncertain and agreed that they were attentive to the risks to both sides of the Committee's dual mandate.”
Walmart (WMT), the giant US box retailer, released their earnings Thursday morning before the bell. I do not own the stock (disclosure), but WMT’s earnings and commentary about the future are very relevant for the broader US economy and its growth engine, the mighty US consumer. WMT’s earnings demonstrated that US consumers remained resilient in 4Q2024, and WMT continued to “benefit” from higher-than-target inflation driving higher income consumers (not normally the company’s target market) into their stores. WMT beat on the top- and bottom-lines, but the grist in the post-announcement share performance was subdued guidance, which caused the stock to get hammered post-earnings. One thing particularly interesting is that Walmart’s management said that two-thirds of their products are produced in the US and one-third are imported, meaning that new tariffs – should they be imposed – might raise the cost of imported goods. The company did not factor in potential effects from tariffs because they cannot predict what might happen, but their caution is an indicator of the supply-chain effects that might occur with blanket tariffs.
US Secretary of the Treasurer Scott Bessent gave a very interesting interview on #Bloomberg #Surveillance on Thursday, that you can watch on YouTube here or listen to on Spotify here. It provides some very good insights into the Treasury’s current thinking regarding funding, interest rates, DOGE and the Fed.
4Q24 GDP growth in Japan far exceeded expectations, coming in at 2.8% vs expectations of 1.0%. Of course, the devil is in the details, but the fact is that the Japanese economy appears to be strengthening with inflation also elevated (CPI was 4.0% in January). Better-than-expected growth and high inflation open the door wider for further tightening by the Bank of Japan in the near-term. As might have been expected, the Yen strengthened following this news although Japanese stocks lost ground, influenced perhaps by the expectation of higher yields ahead.
MY RECENT TRADES
I have been active mainly in covered options early this year, aside from some scrappy adds to existing positions during the DeepSeek (NVDA, ASML) sell-off. Week before last, I put on a series of covered calls on BRK.B, CRWD, V, MCD (post-earnings), and SBUX. The MCD, V, SBUX and second series of CRWD (455s for Feb 21) all expired without incident, generating some good profits. However, I was called on the first series of CRWD (445s for Feb 14) Friday before last, let the shares go, and re-established the position at a sharply lower price late last week. I also got caught out on BRK.B 480s for Feb 21, which I managed to cover flat. On Thursday morning, I wrote a further series of short-dated covered calls for income on AAPL, MSFT, V (reload), BRK.B (reload), NVDA (into earnings).
My confidence in US equities has faded a bit following a volatile start to the year. Although I had considered letting my “insurance” run off, I instead sold the March SPY (S&P 500) puts week before last, then bought new June SPY puts for June on strength on Tuesday. This leaves me with a series of SPY puts expiring in April, May and June, insurance that I am comfortable paying for given the uncertain environment in which we find ourselves at the moment.
WHAT’S AHEAD
German election: The German election is on Sunday. As has been the case recently in many countries around the world, the far-right party (Alternative for Germany, or AfD) has good support and has gained ground. However, the outcome of the election seems relatively predictable, with the challenge being the two or three parties getting the most votes forming a governing coalition. Depending on the outcome, new leadership could usher in dramatic changes in the country that is the key driver of the largest European economy, and the third largest economy in the world.
Economic focus: US PCE data – the Fed’s preferred measure of inflation – will be released late this coming week. We will also get the preliminary read on CPI in the Eurozone for February, important in that the ECB meets the following week. With the focus on the strengthening Japanese economy, preliminary CPI for February will be released, as will Japanese retail sales (for January).
Earnings: S&P 500 earnings have largely wound down, but the focus this coming week will be on Berkshire Hathaway (BRK.B) which reports on Saturday (Feb 22), and the last of the infamous Mag 7 stocks to report, NVDA, which reports Wednesday after the close. In addition, two other important indicators of the US consumer will release earnings this coming week – home retailing giants Home Depot (HD) and Lowes (LOW). A very good source for tracking earnings is earningswhispers.com.
Upcoming central bank meetings:
ECB: Mar 5-6 (expect 25bps reduction in policy rates)
Bank of Japan: Mar 18-19
FOMC: Mar 18-19, including revised Summary of Economic Projections (the CME FedWatch Tool now predicting only one 25bp reduction in Fund Funds in 2025, in July)
Bank of England: Mar 20
MARKETS THIS WEEK
Below [are comprehensive tables / is a summary table] that present[s] how the indices and assets tracked by EMC performed [last week and other periods of time / last week and year-to-date.]
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