A good test this week for the bulls

It was another decent week for stocks in particular; it was a strong week for UK shares for no real specific reason. As we mentioned before, if one is looking for an index lowly valued with constituents exposed to global trends, one can do worse than look to the FTSE 100. On top of that, one receives a handsome bit of income with a dividend yield somewhere around 4%, making a compelling case. Perhaps the death of the UK economy is also a tad exaggerated, as we also tried to illustrate last week.

The S&P 500 held its ground pretty much last week, trading around historic highs. The latest Personal Consumption and Expenditure Index confirms prices continue to fall faster than the Fed anticipated, and economic growth remains resilient according to last week’s GDP report. On the face of it, good news for the Fed, this mixture may also provide them with something of a headache or dilemma, one would suspect. Falling inflation cut rates, tick, strong growth cut rates, less of a tick. One would imagine the Fed, at this week’s meeting, will tow the Lagarde line of wait-and-see when it comes to the first cut. One thought struck me last week: preparing for this note, US interest rates are slightly higher than the peak in 2008; on that occasion, rates at this level almost brought the global economy to its knees, this time round, barely a scratch, apparently. What you do not get is much tech exposure.

This was a mixed week as earnings season comes into full swing now. Intel disappointed investors with its outlook, and Tesla, one of the Magnificent 7, share price likewise fell after reporting weaker margins and forecasting slower growth in 2024. The stock has lost almost 25% of its value already this year. Several of the other Seven report this week, including Microsoft and Alphabet. So far, year-on-year, after just around a quarter of the S&P 500 have reported, earnings are set to decline by just over 1%, according to FactSet, against an expectation of a modest rise. Having said that, FactSet also points out that analysts are pinning a lot on the Mag 7 to deliver very strong earnings growth this quarter.

Aside from many earnings reports this week outside of the Seven, others include Boeing, Starbucks, AMD, and Pfizer, to name but a few; we also get the meetings of the Federal Reserve and the Bank of England. Neither is expected to cut interest rates this week; both will probably sing from the same song sheet, neither ruling in or out the possibility in the coming months. It will be interesting to hear any thoughts Mr Bailey might have as to the current state of the UK economy. At the end of the week, we get the US Nonfarm payrolls report, along with the latest unemployment rate. Obviously, the state of the jobs market indicates underlying economic activity, which is why these reports are of note. We will also get the latest global PMI reports for January at the end of the week.

Stocks are opening this morning pretty directionless; some sentiment indicators would suggest optimism is getting stretched. This week may prove an interesting test for the bulls.