- Federated Hermes’ proprietary risk aversion indicator has seen a sharp inflection towards a more risk-on sentiment on expectation further rate rises unlikely.
- Silicon Valley-based chipmaker Nvidia reported record revenues in Q3 and has seen its stock rise 268% over the last 12 months.
Global equities maintained their rally this week on hopes that central banks have reached the end of their tightening cycles, leaving the US blue-chip S&P 500 Index on track for its strongest month since July last year.
The US Federal Reserve held its benchmark rate at a 22-year high of 5.25-5.5% at the start of the month after 20 months of aggressive hikes.
“Tighter monetary policy has begun to orchestrate the desired effect,” says Philip Orlando, Chief Equity Market Strategist at Federated Hermes.
The US unemployment rate rose from a 53-year low of 3.4% in April 2023 to 3.9% in October; consumer prices index (CPI) inflation declined from a 41-year peak of 9.1% in June 2022 to 3.2% in October 20231; and US gross domestic product (GDP) growth is poised to slow over the next several quarters, Orlando added.
“Even the prospect of a contentious US presidential election next year has not dissuaded the financial markets from donning their rally caps over the past month. In fact, it seems they have discounted the political turmoil,” Orlando says.
Figure 1: S&P 500 on track for its best month since July last year
The S&P 500 has surged by 10.7% since 27 October – largely reversing a similar-sized decline in stocks during August through October – and is approaching Federated Hermes’ full-year target of 4,600. Benchmark 10-year Treasury yields have plunged from a 16-year high of 5% on October 19 to 4.4% on Thursday2.
“We approach December with investors in a more positive place than has been the case for much of 2023,” says Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited. “Our proprietary risk aversion indicator has seen a sharp inflection to a more risk-on sentiment, primarily reflecting the reduced likelihood of further rate rises. Central bankers continue to push the higher-for-longer message, but markets will not listen: the only way is down [for rates],” he says.
Tighter monetary policy has begun to orchestrate the desired effect
“Equity investors are ready for the festive season and lower rate expectations will be a key catalyst to keep the ‘Santa rally’ going through to Christmas. Weak macro data will further fuel equity indices. We can deal with the bills – and the potential hangover – in the New Year.”
In Europe, the Stoxx 600 Index closed up 0.3% on Thursday, a rise of 1.6% over the previous five days, on similar expectations that the European Central Bank has reached the end of its hiking cycle. In the UK, the FTSE 100 closed up 0.2% (a rise of 1% over the previous five days)3 of fiscal announcements by the UK government this week, including tax cuts and investment in artificial intelligence (AI) and manufacturing.
The potential implications of AI once again dominated the media cycle this week. The turmoil at OpenAI, the company behind ChatGPT, seemed to resolve itself as rapidly as it began, although it may take time to unravel how governance and power structures at the non-profit have shifted and what this may mean for the organisation, its key partners and AI more generally.
“Investors in the space have generally reacted positively, with capitalism rather than altruism deemed the winner,” Grant says.
Figure 2: Nvidia stock’s stellar ride on back of AI boom
Silicon Valley-based chipmaker Nvidia, which is behind leading AI applications, reported record revenues of US$18.1bn for the three months to the end of October, up 206% year-on-year , amid strong demand for its high-performance AI chips. The company’s stock has risen 268% over the last 12 months4.
Nvidia’s stellar growth surpassed expectations without truly surprising anyone,” Grant adds. “Valuing these companies, and determining the market share of the various players – even defining what the market is that they are sharing – continues to prove difficult.”
1 Bloomberg as at 23 November
2 Bloomberg as at 23 November
3 Bloomberg as at 23 November
4 Bloomberg as at 23 November