Topic #1: Fed’s Interest Rate Hike Battle
In this week’s market update, the Federal Reserve (the Fed) increased the benchmark interest rates by 0.25 percentage points, bringing it to 4.5%-4.75%. This move was widely expected and is part of the Fed’s commitment to maintaining transparency and stability in the markets. Last year, higher interest rates impacted the values of long-term assets such as Treasury bonds and technology stocks. But this year, stocks and bonds have been rallying, as investors expect lower inflation rates to lead to lower interest rates.
How have markets reacted?
The Fed wants to maintain a positive real interest rate, which is achieved when the interest rate is higher than the inflation rate. This tighter monetary policy slows down economic growth and helps bring inflation down to the long-term target of 2%. So far, the stock market seems to be optimistic about the future of the economy.
Additionally, there have been positive technical signals in the S&P 500 Index and the Nasdaq 100 Index, with the Invesco Nasdaq 100 ETF breaking above a downward trend (red) and closing above the 200-day moving average (yellow).
What is in store for the future?
However, there is disagreement between the Fed and investors regarding the future direction of interest rates. While the Fed intends to continue raising rates to 5% and keep them there for a while, investors believe that economic conditions will worsen and rates will start to come down in the second half of the year. The Fed’s recent rate announcement reiterates their commitment to a restrictive policy and ongoing rate hikes. The next round of this “Fed versus market” battle will take place in March at the next Fed meeting.
Topic #2: Impressive Earnings
Meta, a social media giant, defied expectations with its recent financial results, surprising investors and breaking a streak of underperforming showings. Despite the industry trend of decreasing revenue, Meta reported an increase in monthly active users, growing by 4% to reach over 3.7 billion last quarter, nearly half of the world’s population. The company attributed this success to investments in AI technology, which improved user experiences and increased revenue per active user.
While overall revenue fell for the third straight quarter, it still exceeded expectations and led to a 20% increase in stock shares after Meta announced a $40 billion stock buyback program and projected decent revenue for this quarter while lowering expense forecasts for the year.
Why should I care?
Tech companies like Meta have been undergoing cost-cutting measures due to slackening demand, leading to the loss of over 100,000 jobs in the sector. However, according to a recent analysis by Bank of America, tech companies may still be 20% too large on average, indicating that the cost-cutting measures are far from over.
The bigger picture:
In summary, the current outlook for global tech stocks is positive with a decline in inflation and a potential avoidance of a recession, as predicted by Goldman Sachs. However, the risk of a recession in the US, with a decline in the economy and a rise in unemployment, remains a potential threat to the market and could result in significant downsides for risky tech stocks.
Topic #3: How is the UK and the eurozone fairing?
The Bank of England (BoE) recently raised interest rates by 0.5 percentage points to 4%, marking its highest level since the 2008 financial crisis. The US Federal Reserve also raised interest rates by 0.25 percentage points to a still relatively low level. The European Central Bank (ECB) increased interest rates by 0.5 percentage points to 2.5%, also the highest level since 2008, and is expected to hike rates again next month.
What does this mean?
Despite the potential for an upcoming recession and the previous negative impact of interest rate hikes, there are reasons for optimism. Inflation has been gradually declining, better economic data has been reported, and energy prices have decreased. Additionally, the reopening of the Chinese economy is expected to drive growth. With these factors in mind, the path for stocks in the UK and Europe appears positive in the short term, with the potential for further outperformance compared to US stocks.
Top Earnings at a Glance:
|Index||Level||1 Week||1 Month||From Jan 1 2023|
|S&P 500 (US Stocks)||4,136||2.15%||7.36%||8.17%|
|Nasdaq 100 (US Tech Stocks)||12,573||4.37%||15.20%||15.75%|
|CSI-300 (Chinese Stocks)||4,141||-2.95%||4.36%||6.53%|
|Bitcoin (in USD)||23,305||2.07%||36.62%||40.62%|
Source: Google Finance, as of 4th February, 2023