If you thought January was a good enough month, fasten your seatbelt, because February took us on another uphill ride. A lot of that outstanding performance comes from excellent corporate results, and the rather positive forward guidance that seem to exclude any sort of recession. But a big part of the rise can also be explained by market sentiment (see chart of the month). The US inflation figure (3.1% in January vs 3.4% in December) also helped feed the interest rate cut narrative (remember that lower interest rates are typically positive for stocks). However, labor figures remain very strong and may make the Fed reconsider cutting rates in the near future.

The US markets had a fourth straight months of excellent performance. However, it should be noted that 35% of the constituents of the S&P500 are performing better than the index, while 40% have a negative performance YTD. We should also be aware and wary of the fact that 10% of the stocks represents 75% of the entire market, meaning there currently is a very high concentration. All eyes are now on the February inflation figures and the Fed meeting shortly thereafter. This is likely to set the tone for the next quarter, before elections take the spotlight. As for macroeconomics, the US GDP for Q4 2023 came out at 3.2%, the composite Purchasing Managers’ Index (PMI) remains in expansion both in manufacturing and services, and inflation down to 3.1% despite healthy job data. This all points to a clear sky and the word recession seems to have disappeared for the time being.

Europe also surfed on the wave of euphoria, the Eurostoxx 50 performing +4.93% in February. The inflation figure at 2.8% looks similar to the US. Unfortunately, that is as far as the similarities go. PMIs are in contraction, growth is zero at best. But the economic situation doesn’t always translate into the stock market. Europe remains undervalued when compared to the US and this, paired with very decent company earnings results may be a strong reason for the recent performance.

China was a big surprise this month, as it had its first significant positive performance since July 2023. The People’s Bank of China, in an attempt to support the real estate market, started to intervene by cutting rates. It further injected liquidity, which was well received by investors and an indication that further measures may be coming. Chinese authorities also tried to stop the bleeding on the equity market by announcing more restrictions on short selling, which may actually result in the opposite effect, as investors prefer a free market.

Unlike Japan’s economy, which lost 3rd place to Germany in terms of size, its stock market had a stellar performance once again in February, reaching an all-time high, unseen since December 1989. The catalysts were corporate governance reforms, strong corporate earnings and a weak Yen (though that also means that performance translated into USD is less appealing). Finally, Japan also seems to be benefitting from the geopolitical risks surrounding China, making Japan a more compelling option as investors look for opportunities elsewhere in Asia.

Our summary recommendations

The strong performance following the good corporate earnings have benefited our long exposure to the stock market, but also provided additional downside protection to existing structured products. Unfortunately, this also translates into products being recalled and difficulty in issuing new products at attractive coupons.

As bonds mature, we are reinvesting in quality names with a duration of 2-2.5 years in order to lock a still attractive yield, before rates go down.

We continue to overweight alternative investments, which are rather decorrelated with stock markets and provide attractive and less volatile long-term returns.

Chart of the month

The Nasdaq has performed extremely well since the beginning of 2023 (+65%). But when compared to Nvidia (+455%) and Bitcoin (+275%), the Nasdaq is dwarfed. Nvidia is the poster child for the artificial intelligence theme, most companies involved in AI buying all the chips they can get their hands on to power their AI algorithm.
Bitcoin profited from the approval, by US market regulators, of Exchange Traded Funds (ETF). This removed a lot of doubt surrounding the legality and acceptance of Bitcoin (and surely other cryptocurrencies in the future) in the eyes of governments. It also made it a lot easier to buy and sell the crypto, which was a large barrier to many investors. Incidentally, Nvidia is being further pushed up by the rise of Bitcoin which mining is calculation intensive and requires fast GPUs.

Even if rational explanations could be given for enthusiasm around AI perspectives, the stellar performance of both companies illustrate a high level of speculation in the market and an excessive greed level according to the “Fear and Greed Index”.

Nvidia or Bitcoin, place your bets!

The Fed acts when it must, the ECB when it can and the SNB when it wants

The show must go on…