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Global equities fell during the week as investors pared back bets that developed market central banks will begin trimming interest rates in the first quarter. The yield on the US 10-year Treasury note rose to 4.00% from a year-end level of 3.88% amid the heavy issuance of US investment-grade debt, strong US employment data and the anticipation of a slower pace of rate cuts. The price of a barrel of West Texas Intermediate crude oil rose $2.20 to $74.80 amid the continued disruption in Red Sea shipping traffic and on the shutdown of a Libyan oil field because of. Volatility, as measured by the Cboe Volatility Index (VIX), rose from 12.50 at the end of 2023 to 13.50.
Technology advances and AI will continue to have profound impacts on our lives and the markets.
As we enter the 2024 year, one theme we are playing close attention to is the “Magnificent 7”: Apple, Microsoft, Alphabet [Google], Amazon, Nividia, Meta and Tesla. Apple and Microsoft are considered Mega Caps with valuations exceeding 200 Billion. Alphabet, Amazon and Nividia are considered large cap with valuations exceeding 10 billion while Meta and Tesla are considered Mid Caps with valuations exceeding 2 Billion. Apple posted earnings of 89.5 Billion in the last quarter while Microsoft earned 56.52 Billion. Tesla was the only one of the seven that missed earnings expectations in the last quarter.
Then there are small caps with valuations exceeding 250 million. Normally we would expect to see share buybacks as each of these magnificent 7 companies report 4th quarter earnings, but this time we may see a different strategy. All of these companies are sitting on large amounts of retained earnings and they are trading at levels near the top end of their range. Small and Mid-Cap companies are much more reasonably valued and in the small cap space we see valuations as cheap in many cases. We think it is likely a better strategy for these companies to use their cash to purchase small to mid-size companies that can enhance their current technology. Therefore, we believe Merger and Acquisition will be a major theme in 2024.
As we look around the world for investment opportunities, we remain convinced that at the start of this year, the US markets continue to reflect the best risk/return. Canada, which is a resource-based nation, will probably continue to underperform the US in this slow growth environment. Europe, with its persistently high inflation, is far behind in recovery and emerging markets, including China. W expect they will continue to underperform in the early part of 2024.
CANADIAN ECONOMIC NEWS
In Canada, we are clearly in a recession due largely to the slower global growth and persistent high interest rates. Canada was expected to show job growth of 13,500 in December but came in with only 100 net new jobs. Canada’s unemployment rate held steady at 5.8% in December.
US ECONOMIC NEWS
Earnings season gets underway next Friday with a focus on large US Banks.
Markets pared back bets that the US Federal Reserve will begin cutting rates as early as March as December nonfarm payrolls rose a stronger-than-expected 216,000 and unemployment held steady at 3.7%. Average hourly earnings rose 4.1% year over year. Ahead of the data, yields had been rising all week amid the heavy issuance of US investment-grade corporate debt, but the employment report helped send yields briefly toward 4.1%. A sizable downward revision of 71.000 jobs of the prior two months nonfarm payrolls took a bit of the sting out of the strong December report. The odds of a March cut fell to 60% after ending 2023 at 100%.
US purchasing managers reported a sharp slowdown in orders in December, dragging down the Institute for Supply Management’s nonmanufacturing PMI to 50.6 from 52.7 in November. The unexpectedly weak showing saw bond yields reverse their early losses and drop back below 4% from near 4.10% after the upbeat employment report.
In a sign that the US labour market is cooling, job openings in November fell to 8.79 million from 8.85 million in October. That’s the lowest level of unfilled job openings in over two years. However, weekly jobless claims data show that layoffs remain low, having fallen to 202,000 in the final week of 2023.
EUROPEAN ECONOMIC NEWS
Amid a phaseout of energy subsidies for consumers and businesses, euro zone inflation rose 2.9% year over year in December, up from November’s 2.4% pace. That’s the first rise in six months, though the core measure continued to decline, falling to 3.4%.
CHINA, EMERGING MARKETS and JAPAN ECONOMIC NEWS
Just over a week before Taiwan’s presidential election, the final polls show Vice President Lai Ching-te of the Democratic Progressive Party, which supports Taiwan’s independence, leading the more Beijing-friendly Kuomintang party’s Hou Yu-ih by an average of five percentage points and the Taiwan People’s Party’s Ko Wen-je by 12%. The DPP’s Tsai Ing-wen has held Taiwan’s presidency since 2016, but is barred from running for a third term.