“There is a wisdom of the head, and a wisdom of the heart”. Dickens
May you live in interesting times, derived from a Chinese phrase referring to times ironically to indicate a period of chaos or disorder. Geopolitical risk as Biden seeks to find a path of retaliation and retribution for the death of 3 US soldiers without further inflaming tensions in the Middle East, risking a spike in the oil price. With Trump in the background and others now on the bandwagon, declaring we are possibly on the brink of the third World War. We have earnings in full flow as five of the Magnificent Seven post-earnings reports this week. Two last night, Alphabet and Microsoft came in pretty much in line and saw a modest sell-off in after-hours trading but nothing too dramatic. Funds remain heavily overweight big-cap tech, damned if you are and damned if you are not. The IMF, whose ability to forecast which day follows the next is questionable, did raise their outlook for the global economy as they declared the global economy continues to show remarkable resilience. They also gave Mr Hunt some tax advice, recommending he does not cut taxes in the upcoming budget but invest receipts in public services. I will leave you to make your mind up on that one.
Chinese equities continue to suffer as the introduction of stimulus measures from the authorities so far has not excited investors. However, according to a Citi research report, they are seeing signs of money flowing into Chinese equities after a 40% decline. Later tonight and tomorrow, we will get the outcomes of the meeting of the Federal Reserve and the Bank of England; neither is expected to lower rates, but both are supposed to acknowledge the easing of inflationary pressures and possibly give further hints as to when rates might start to be cut. I repeat the point I made the other day; it seems remarkable that we have the same interest rate levels today that was the catalyst for the financial crisis 15 years ago and appears to be hardly causing a ripple this time round.
Large-cap US stocks climb to new highs, driven largely, as we all know, by a small band of merry men. I am bored of the Mag 7 analogy. The Russell 2000 index is made up of those companies whose market cap is just below the S&P 500 and still languishes below levels reached three years ago. The Russell 2000 has underperformed the S&P 500 by around 6% per annum on average since 2015.
The Vix index, despite all these potential banana skins out there, is close to its historic lows, which would suggest that equity investors remain confident tricky waters will be safely navigated. We do live in interesting times.