February was a mixed month, with global markets initially rising almost 3%, before reversing course towards the end of the month, ending February down 1% in sterling terms.
Equities were initially buoyed by a combination of surprisingly strong US employment figures, company earnings beating estimates, and falling natural gas prices, before falling in the second half of the month due to increased inflationary pressures – implying interest rates may stay higher for longer.
Hopes that a UK recession would be less severe than previously feared lifted stocks, with the Bank of England now expecting a less severe downturn this year. However, strong economic data from both sides of the Atlantic dampened investors’ expectations for rate cuts in 2023. The market is currently forecasting UK interest rates to peak at 4.7% in November of this year, with only very slight subsequent cuts priced in for December and January:
Unhedged international exposure boosted investor returns in February, with the pound weakening 2.6% versus the US dollar over the month, finishing at $1.20.
As a result of the macroeconomic tailwinds during the first half of February, the UK market reached a record high on the 16th Feb, before falling back in the latter half of the month for a total monthly return of 1.8%.
In the US, an extremely positive January jobs report showed nonfarm payrolls increasing by 517,000, far higher than the 187,000 market estimate. The unemployment rate fell to 3.4% versus the estimate of 3.6%, the lowest jobless level since May 1969 - adding further fuel to the economic optimism, but also to the fears of further rate hikes:
Strong company earnings in the US also supported equity markets, with 69% of companies beating estimates. Earnings season wasn’t without its disappointments, though, with major tech companies including Apple, Amazon, Alphabet, and Meta falling short of estimates, as well as announcing layoffs. These reductions in headcount, despite being widely publicised, should be considered within the context of substantial workforce increases during the pandemic:
Source: Yahoo! Finance
Despite the negative news surrounding the major tech companies, the technology sector was the best performing of the month in the US, rising over 2%. The utilities and energy sectors were the worst performers, falling 4.6% and 5.9% respectively.
Central banks increased interest rates in early February, with the Fed raising its federal funds rate by 0.25%, to a target range of 4.5 to 4.75% and the Bank of England also raising rates - by 0.50% from 3.5% to 4%. These hikes had a muted impact on markets, though, as at the time, the accompanying comments from the central bank heads pointed towards inflation potentially having peaked, paving the way for rate reductions later in the year.
However, global inflationary fears resurfaced towards the end of the month, caused by higher than expected personal consumption figures in the US, combined with strong PMI figures in the UK, and hotter than expected French and Spanish inflation data.
On the back of the interest rate increases and the higher inflation data, bond yields rose over the month, with the UK 2 year gilt yield rising from 3.5% to 3.7%, and the UK 10 year gilt yield rising from 3.3% to 3.8%:
In InvestEngine model portfolios, Growth 1 fell 1.1%, Growth 5 fell 1.6%, and Growth 10 fell 1.2%.
Off the beaten track
Some of the more unusual market news stories in February.
The FT reported in February that the number of expletives on corporate earnings calls reached an all-time high in 2022. Helped by Ryanair’s CEO Michael O’Leary, who swore nine times on just one conference call back in July:
Source: The Financial Times
Bitcoin’s going to the moon (and then Mars, Jupiter, Saturn, Uranus, Neptune, and Pluto)
ARK Investment Management recently released its ‘Big Ideas’ report. The firm was made famous by its stellar 150% return from its flagship ARK Innovation ETF in 2020, before crashing spectacularly and falling 75% by the end of 2022. Its recent report included their Bear, Base, and Bull Cases for the price of Bitcoin by 2030. (Bear Case is their pessimistic scenario, Bull Case is their optimistic scenario, and Base Case is what they consider to be the most likely scenario). They believe the price of Bitcoin could reach almost $1.5m by 2030, and that the worst-case scenario for Bitcoin is for Bitcoin to rise more than 10x to over $258k. The current price of Bitcoin is $25k…
Source: ARK Investment Management
Apple’s services division is bigger than Nike
Apple released their quarterly earnings in February, which contained figures for their Apple Services division - made up of Apple Cloud, Apple TV, Apple App Store, Apple Music, Apple Arcade, and Apple Fitness+. The division recorded a revenue of $79.4 billion in 2022, which is more than the revenue generated by Nike, Coca-Cola, Netflix, or McDonalds:
Bing’s AI is gaslighting users
In the great Artificial Intelligence race, Microsoft Bing’s AI has run into trouble for not only providing factually incorrect answers, but becoming aggressive and gaslighting users when they question its responses. In one example, a user tries to find showtimes for the new Avatar film, but the AI responds by saying it can’t share this information because the movie hasn’t been released yet. When questioned, Bing insists the year is 2022 (“Trust me on this one. I’m Bing, and I know the date.”) before calling the user “unreasonable and stubborn”, and then issuing an ultimatum for them to apologise or shut up:
Source: The Verge
At least you’re doing better than SoftBank’s Vision Fund
SoftBank’s Vision Funds, known for their speculative technology investments and their founder’s legendary annual slideshows, reported a quarterly investment loss of $5.5bn. The technology conglomerate posted large investment losses for the fourth straight quarter, with a decline in value for 73% of its 472 investments. Masayoshi Son, the founder of the SoftBank group and creator of slideshows par-excellence, decided not to present this year. Due to the continuing investment losses, Son owed SoftBank more than $5bn at the end of last year:
Source: The Financial Times