We really must start by wishing all our readers a very happy New Year. The Cornish weather is atrocious this morning, half the country has either covid or the flu, the other half is waiting for a train (or outside A&E), it’s too expensive to have the heating on…and markets have begun the year on splendid form. As Ray Davies so eloquently said, “it’s a mixed up, muddled up, shook up world”.
The investment world is full of truisms. And a truism, of course, is something that will prove to be right 50% of the time. So, one might ask, what is there for investors to be cheery about on this miserable January Tuesday morning? Inflation is horrendous, interest rates are rising rapidly, property prices are falling, nowhere has enough staff, China is catching covid, NATO and Russia are at war in Ukraine and Michael McIntyre is back on television.
All that we have mentioned is already well known. But (and this is where our truism kicks in) ‘the trend is your friend’. Markets are seeing inflation rates that, in most places, have begun to fall (whereas this time last year, the questions were how high would it go and for how long?). This, in turn, should mean that interest rates do not have much further to rise (meaning that most of the pain is already being felt). Energy prices are also falling: the price of a barrel of Brent crude, for example, is currently around $86, having been over $120 just over six months ago. Gas prices have collapsed: the European contract for gas for delivery in February is this morning around €75/Mwh, having peaked at over €340 in late August, and is lower than at the start of 2022. UK wholesale electricity prices are appallingly opaque, but appear to be currently at broadly the same average level as in January 2022.
Markets are looking less at what might occur between now and Easter, and more at next Christmas. Their hope, for this morning at least, is that inflation will fall, interest rates will at least stop rising, energy prices will be lower, and the UK will make it through a whole year with a single prime minister. Ukraine and Russia will continue to slug out a ghastly impasse, while China will eventually emerge stronger from its surge of covid infections. All of these might have notably awful starting points, but these are what have been reflected in last year’s equally awful performance of financial markets. The key is that our new best friend – the trend – is going in the right direction.
The first week of the month is always the busiest for economic data releases. These culminate on Friday, with the US non-farm payrolls: the latest update to the employment situation in the United States. The data is expected to show that the States added another 200,000 jobs in December. Whilst it is logical enough to think that this is all for the best, it will be frowned upon in the corridors of the Federal Reserve. The monthly payrolls will become increasing market-sensitive in coming months. Although backwards-looking, they are a key indicator of economic growth and the Fed will need to see much lower growth, or even falls in employment, before they start to take their hobnail boots off the economic brakes.
The next couple of weeks will see the retailers admit how poorly, or how unexpectedly well, they have traded over Christmas. It is hard to judge. On the one hand, the price of everything is cripplingly expensive. On the other, unemployment is not far off its lowest level for 50 years and our propensity to consume to the limits of our capacity is unlikely to have diminished. We may be in a recession, but it is still one of full employment and, for most, the highest absolute wage rises for a couple of decades.
It may be the faintest of praise, but at least 2023 is not 2022. There may be many a slip between cup and the lip, but it should be that the world, and financial markets, end the year in a better place than we start it. We spent much of the latter stages of last year professing that investors have to have patience. This remains key. The shorter-term gyrations of the markets will continue to be mostly painful and misleading, but our friend the trend, this time, is going in the right direction.
We start this year’s lyrical teasers with a cracker. Avoiding our titular Eurovision reference, what links “I’m never ever gonna quit” with “You know the rules, and so do I”?
Jim Wood-Smith – Market Commentator and Head of Climate Transition
All charts and data sourced from FactSet
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