The Magnificent Seven remain the new defensives

• Large-cap tech firms remained investor favourites amid market fluctuations and geopolitical tensions, bolstered by cautious rate cut projections from Fed Governor Waller.
• December's retail sales exceeded expectations, indicating robust consumer spending despite economic uncertainties.
• Shipping company CEO discussed shipping disruptions at the Davos conference.

The past week was shortened due to the U.S. markets closing on Monday for Martin Luther King Day. Nonetheless, it was filled with significant data from economists and quarterly corporate earnings reports.

Large-cap U.S. tech companies once again emerged as the week's safe-haven, with investors favouring them amidst rising bond yields and ongoing geopolitical tensions. We would say the Magnificent Seven are back, but did they ever truly leave? Interest rate discussion favours these companies, and we had some this week courtesy of U.S. Federal Reserve (the Fed) Governor Christopher Waller. In his first public address since late November 2023, he tempered expectations of imminent rate cuts. He suggested possible reductions in 2024 and advocated for a cautious approach given the robust economic environment, marking a departure from expectations of rapid rate cuts. His comments influenced market, with the perceived likelihood of a March rate cut decreasing to between 50% and 60%, a significant drop from last Friday's 86%.

Waller mentioned his attention would be on the Retail Sales Report, as he wanted to gauge cooling consumer spending. Well, the report came out and it was hot. December's retail data exceeded expectations, with a 0.6% increase compared to the predicted 0.4%, and a notable rise from November's 0.3%. Excluding auto sales, growth was 0.4%, surpassing the 0.2% forecast. In short, December's holiday sales outperformed expectations significantly.

The week also brought insights from ongoing earnings reports and the Davos conference. The shipping crisis, a topic we touched on last week and delve into in this week's podcast, was highlighted by the CEO of shipping giant Maersk. He discussed the challenges in the Red Sea, predicting prolonged transit times and supply chain disruptions for multiple months. Jamie Dimon, CEO of JP Morgan, while also present in Davos, made more impactful statements following his company's earnings report. He noted that consumer spending patterns are shifting, but still indicated a stable consumer environment. “The way we see it, the consumer is fine. All of the relevant metrics are now effectively normalized.”

In international news, China released key economic data. Its Q4 gross domestic product (GDP) growth was 5.2%, close to the 5.3% expectation. Interestingly, official statistics also mentioned a statistic we discussed here some months ago: the youth unemployment rate for 16- to 24-year-olds incredibly declined from 21.3% to 14.9%, not including students. Unbelievable numbers, quite literally. On a more serious note, the report also observed a slowdown in inflation indicators across wages, input costs and selling prices, yet thankfully remaining above deflation levels.

Listen to this week’s podcast for further insights.