A Week of Pivots, and Green Shoots Persist

By Aoifinn Devitt, Chief Global Investment Strategist

It has been a week filled with newsflow and our weekly update is coming to you a little later than usual. As we turn the corner into February, investors could be forgiven for feeling that Groundhog Day was real with certain narratives seemingly playing on repeat and investors reacting in the same pattern.

Spring seems to be the season for banking woes, and in a dim echo of last Spring’s regional bank crisis there were indications of weakness emerging from the sector, with New York Community Bancorp stunning markets with a loss provision of $552 million related to commercial property.  This segment seems to be a source of chronic pain for the regional banks, albeit one that is well-managed from time to time by counter-newsflow. The counter-narrative around commercial real estate being a time bomb of write-downs for banks is that the area is complex, opaque and full of nuance (e.g. some offices are thriving, and multi-use of sites is restoring vitality and demand in certain areas).  So, from the outside looking in we may never know the full picture – and any correction in this market is likely to be slow and painful rather than “big bang” given the nature of leases and the lessons learned from 2008 in terms of sizes of exposure and diversification.  It does cloud the outlook for small and regional banks though, so we will watch this space very carefully.

There was more newsflow from the US Federal Reserve this week and a continued pause on rate rises and an indication that the next move is downwards.  The timing and magnitude of that is clearly an open question, and the Fed Chairman, Jerome Powell, would not be drawn on when the committee’s “level of confidence” would be such that inflation had been sufficiently tamed and interest rate cuts could begin.

There was more positive news at the end of the week as January’s news of 353,000 new jobs being added was parsed as “shockingly good” with unemployment staying steady at 3.7%.

Equity markets received the mixed messaging of strong tech earnings and the US Fed confidence gap with some indigestion and moved in a sideways fashion all week.

Source: Morningstar as of 2/2/24

They celebrated tech stocks Meta and Amazon, in the case of the former an inaugural dividend was cause for cheer, but also a pivot of sorts from its legendary growth status.  Apple on the other hand was penalized for a slowdown in its China sales.

Increasingly tech stocks have been described as a “bulwark” against geo-political uncertainty, underpinned by the seemingly unbreakable resilience of consumer demand. Have they now become – in investor’s eyes – too big to fail? They have certainly stolen the limelight this earnings season as other sectors such as pharmaceuticals strive for attention with RSV and Shingles vaccines, migraine, and weight loss medications as well as other advances – all surely topical in this chilly time of year.  As we enter a slightly longer month of February this leap year, green shoots seem poised to keep appearing.



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