“So it does sort of seem that there is an air of optimism around. I think part of that is because we came into this year down the dumps, feeling like recession was around the corner.
“And then sort of the opposite has happened, and things started to turn around, and there’s a bit of a rally.
“Markets grabbed hold of that and ran with it.”
The sentiment is largely being driven out of the US but there were also signs of a peak in Europe and tentative signs in New Zealand.
Tech stocks in particular have seen a big bounce in the year to date.
The tech-heavy Nasdaq index is up more than 13 per cent for the year to date.
Tesla stock - hammered late last year - is up more than 70 per cent, although still a long way off its highs from early 2022.
“I think it’s the best January since 1999 for the Nasdaq,” Taylor said.
In the US economists now saw the peak for inflation as being last June - at about 9 per cent, he said.
So the latest reading for December, at 6.4 per cent, represented a solid decline over that six-month period.
“And the indications are that it’s going to continue to fall. So that has given investors optimism that Fed rate hikes are coming to an end, or getting pretty close to an end.”
US markets had now started to price in the assumption that rates will fall later in the year, Taylor said.
“And of course, with lower rates, it’s better for growth assets with long-dated earnings ... that’s the tech sector.”
In New Zealand, we have continued to grapple with ongoing wage pressure and food price hikes.
But some of the big international factors, like oil prices and shipping costs, have normalised.
“So we’ve seen a fall in commodity prices from a year ago,” Taylor said.
But some food and services prices, as well as wages, were keeping inflation high for now.
Wages were looking like “the last shoe to drop” for the Reserve Bank, he said.
There were early signs in labour data this week that they might be starting to moderate and were expected to through the rest of this year.
Picking peak inflation in New Zealand was harder because we only get data quarterly (as opposed to monthly in the US), he said.
“It has been hovering around 7 per cent for the last couple of quarters, so it is difficult to know the exact peak month, but it was probably near the end of last year.”
We won’t see new Consumer Price Index data until April.
As well as the lag in data, New Zealand had specific issues with immigration and a very tight labour market which meant inflation might take longer to fall here, Taylor said.
So while the US might have inflation back near the 2 per cent target by the end of this year it was likely to be 2024 before we saw those kinds of falls in New Zealand.
The overall trend was good for markets but Taylor said he was still wary of expecting too much.
There were still plenty of challenges out there for businesses, including the broader economic slowdown.
The recovery was unlikely to be a straightforward V-shaped bounce like we saw after the initial Covid slump.
“I think the sharemarket will probably be quite choppy, not necessarily heading to lows from 2022, but I think it’ll be quite up and down throughout the year,” he said.
“So it will be, as they call it, a bit of a trader’s market for this year.”
- The Market Watch video show is produced in partnership with Pie Funds.
