In this week’s update: Record US stock market highs, Japan’s shrinking economy and the latest UK inflation figures.
The US bull market run shows no signs of losing steam, at least not for now. US stocks closed at record highs on Friday as investors put aside concerns about the coronavirus affecting global supply chains.
The S&P 500 and Nasdaq indices both closed at record levels on Friday underlining the strong start shares have made to 2020. US markets were closed on Monday for the Presidents’ Day holiday giving investors an extra day to reflect on their gains.
Of course, US returns have not just benefited holders of US-invested funds, American shares make up around 40% of global stock markets by valuation. So, any well diversified global fund should hold a healthy weighting in the US.
The S&P represents the main market of US companies while the Nasdaq focuses more on the technology sector. Both, however, are dominated by the small group of superstar tech firms which have been big contributors to stock markets returns over recent years. Facebook, Amazon, Apple, Netflix and Google - or FAANGs for short - now account for something like 15% of the S&P by market cap. Holding them has been crucial to capturing the gains made in the US.
While index-tracking funds automatically hold every stock on the index they mirror, some actively managed funds have avoided these high-flying tech firms on fears they have become too expensive.
Leading the pack has been Apple, which continues to post strong sales in both its traditional hardware categories but also growth in its services divisions. The company has been busy buying back billions of dollars of its own stock, which is good news for investors in two ways. First, it removes the number of shares in circulation, boosting the values of the shares that still exist. Second, it displays the confidence that Apple management has that the company is undervalued and will produce more than the market currently expects.
Now more than ten years since the financial crisis, investors will be wondering how much further this bull-run can last. Worries over the spread of coronavirus pulled the S&P down in January but the market has since recovered as fears over its spread appear to be receding.
However, with gold at $1580 an ounce, which is close to its recent seven year high, means demand for the safe haven asset is still strong, suggesting not everyone has joined the party on Wall Street.
Meanwhile on the other side of the world latest figures from Japan paint a gloomy picture of the country’s economy. The latest gross domestic product data published on Monday revealed the economy shrank at the fastest rate in five years from October to December.
Analysts were expecting a drop in GDP of 3.7%, however the annualised figure fell by 6.3%, causing economists to warn that the world’s third largest economy is heading for a recession. A sales tax rise, typhoon and weak global demand all contributed to the fall.
During the period Japanese consumer spending fell 2.9% after the country's sales tax was raised in October from 8 to 10%. In the same month a typhoon hit large parts of the country.
Now Japan faces the coronavirus threat which is affecting the number of Chinese tourists visiting the country. Japan is one of China’s most popular tourist destinations with over 8 million Chinese visiting in 2018, up over 13% year on year. Chinese visitors spent more than US$13 billion in 2018, accounting for nearly 34% of all spending by foreign visitors, according to Japanese government data.
In response to the data, economy minister Yasutoshi Nishimura said the Japanese government was ready to take all necessary steps to deal with the impact of the coronavirus outbreak on the economy and tourism.
Having spent millions of Yen preparing for the Olympic games this summer in Tokyo, the Japanese government will be doing all they can to ensure visitor numbers are strong.
A reduction in tourists is also hitting Australia hard in the wake of the recent bushfires and now the coronavirus threat. China is both Australia’s largest trading partner and largest tourism market. So news last week that the Australian government’s travel ban on people who have travelled through China has now been extended by another week, only heightens the impact the virus will have on the Australian economy.
Also, Chinese students are a major source of income for the country and with many unable to enter the country, Australia’s near 30 years of uninterrupted growth may well be challenged.
Closer to home, here in the UK inflation figures are due on Wednesday. Inflation fell to its lowest level in more than three years in December. The Consumer Price Index (CPI), which measures the cost of typical UK household purchases, was 1.3% in the year to December 2019 according to the Office for National Statistics.
This is well below the Bank of England’s target of 2% inflation. While consumers may welcome a slowdown in price rises, the more negative side of lower inflation is that it signals less economic activity and therefore slower growth in the economy. Prices rise more quickly when businesses think their customers are able and willing to pay the extra cost. The fact that inflation is falling suggests businesses are struggling to maintain sales.
But it won’t just be the Bank of England keeping a close eye on the inflation data. Following the surprise resignation of Sajid Javid last week, the new Chancellor Rishi Sunak will also be watching it carefully.
Mr Sunak has three weeks to prepare for his first Budget scheduled for 11 March, however there has been speculation this date may be moved to allow him more time to prepare.
The reality for the Chancellor is more money will need to be raised to keep the promises made by Boris Johnson in the December election. Low productivity, high spending commitments and a desire to end and ultimately reverse austerity all point to higher taxes.
Among the company results to look out for this week are the miners - Glencore, BHP and Anglo American. With China being a significant buyer of commodities, investors will be looking to see how the coronavirus is dampening demand for raw materials. Back in July Anglo-American reported its best half-year results since 2011 thanks to surging iron ore prices.
Finally, this weekend we can expect an update from the “Sage of Omaha”, Warren Buffett. On Saturday his company Berkshire Hathaway reports fourth-quarter results. The legendary investor has been struggling to find suitable investments of late, with the company’s cash level increasing to a record $128 billion in the third quarter.
For more on what we can expect to hear from Mr Buffett, tune in to this week’s MoneyTalk Podcast, where Tom Stevenson and Ed Monk discuss the subject in more detail. If you don’t already subscribe to our two weekly podcasts, just search for ‘MoneyTalk Radio’ wherever you get your podcasts.