Stock market outlook 02/2024: American Dream

February 7, 2024

What has been the focus in recent weeks

The global economy has sent out many positive signals in recent weeks. India, for example – together with China the most populous country in the world – is proving to be a real growth engine in the Asian region. However, the big surprise in the developed markets has come from the USA. Gross domestic product increased by 3.3 % on an annualized basis in the fourth quarter, which was much higher than generally expected, even though inflation rates are now low. The services sector in particular is proving exceptionally strong: the Purchasing Managers’ Index in this sector rose by 2.9 points to 53.4 points in January. This puts the barometer well above the growth threshold of 50, which suggests further economic growth. Rising new orders and more jobs are evidence of a very robust economy. There is also positive news from US industry: With an increase of 2.0 points to 49.1 points, the Purchasing Managers’ Index for the manufacturing sector is also stronger than expected.

The biggest surprise came with the recently published figures on the US labor market. 353′000 new jobs were created in January compared to expectations of just 187′000. This means that the labor market is much stronger than expected. On the growth side, the US economy is not only doing very well, but this growth is also remarkably broad-based. In addition, private consumption, which is so important for the USA, continues to grow strongly. A look at the results published by companies in the US also paints a positive picture. Caterpillar, for example – a major manufacturer of construction machinery and a good indicator of the economy – reported strong results that far exceeded expectations. 2023 was the best year in the history of the almost 100-year-old company.

On the risk side, investors need to keep an eye on the impact of the strong economic development on inflation. If inflation does not fall further, the interest rate cuts by the US Federal Reserve will not turn out as expected. This would have a negative impact on share prices. The US debt burden is also a concern for some investors and must of course be monitored. But it’s never all sunshine and roses on the markets. Anyone who wants to wait until the fog has lifted before entering the stock market, for example, will have to wait forever.

Our investment solutions and positioning

While the “Alternatives” and “Bonds” asset classes in our multi-asset strategies suffered a slight decline at the start of the year, equity investments more than compensated for this. Although these also started the new year with a decline, they recovered over the course of January, which even brought us new all-time highs in some share indices. The currency situation is also encouraging, with both the US dollar and the euro gaining slightly against the Swiss franc since the beginning of the year, thus also contributing to the positive overall result.

A look at the components of our Global Equity Trends strategy reveals a familiar picture. The ranking is led by communications companies, followed by technology stocks and high-growth companies. The long-term trends in these groups of companies are therefore still intact and there is no sign of a trend reversal. The laggards at sector level are real estate stocks, utilities and companies in the raw materials and commodities sector. This also led us to divest our exposure to real estate stocks at the beginning of February and add small-capitalized growth companies to the portfolio instead. Our selection in the trend strategy therefore remains focused on further rising equity markets.

On the Swiss equity market in general, as well as in our Swiss Equity Selection equity strategy, the heavyweights had a negative impact. For example, Novartis and Roche, as well as Logitech and UBS, failed to convince investors. They were punished on the stock market with immediate price falls. With a drop of around 3.5 %, Novartis fared the best of the four companies mentioned. Logitech was hit the hardest, with its shares falling by 8.7 % on the day of the report. Nevertheless, these quality companies remain interesting from a long-term perspective. On the other hand, there was more encouraging news from Givaudan. Investors celebrated the quarterly figures of the world’s largest manufacturer of flavors and fragrances with a gain of over 8 %. At the beginning of the month, Straumann benefited from a good result from “Align Technology”, a competitor in the field of dentistry from the USA. Straumann itself will present its results to investors on February 27.

Our Global Equity Selection equity strategy has made a brilliant start to the year. With the exception of Ansys and Lululemon, all of our investments have made a positive contribution to the overall result. However, both of these companies are merely undergoing a healthy short-term correction following the strong price gains at the end of 2023. So far, we can look back on a pleasing reporting season in this strategy. Apple and Microsoft, for example, fell slightly short of expectations, but did not record any major price declines. The company in the luxury goods sector, Louis-Vuitton LVMH, was particularly pleasing. The previously seen weakness, particularly in the Chinese business, seems to have been overcome for the time being and we are positive about the future.

What next? And what needs to be considered?

The 2023 corporate results reporting season is in full swing. In the US, almost 80% of the largest 500 companies have so far exceeded earnings expectations. For the coming financial year, analysts have raised earnings expectations in all sectors except utilities, consumer staples and energy. The big question for the future among technology companies is: who will succeed in winning the race in the field of artificial intelligence? The clear biggest beneficiary in this area so far is Nvidia. Its annual report will be published on February 21 and is eagerly awaited.

Meanwhile, the central banks are still keeping key interest rates high. Investors are focusing strongly on the signals regarding expected interest rate cuts.

Overall, we remain confident for the 2024 investment year. Falling interest rates in a relatively stable economic environment provide good conditions for both equities and bonds. However, a lot of positive factors are probably already priced into share prices and increased volatility on the markets must therefore be expected.
In the multi-asset strategies, we are sticking to our overall balanced approach – with a slight bias towards growth-oriented stocks. We are preparing for a possible more cyclical orientation if indicators such as the purchasing managers’ indices continue to signal this. For both equities and bonds, a focus on high quality is called for: companies with a strong market position, low debt and high profitability. On the currency side, we expect the Swiss franc to remain strong.

Point Capital Group
7. February 2024