April’s Opportunity Report has been published! You can find it here:
It was an eventful week on the economic calendar, as well as on the corporate earnings front. After a sudden and sharp S&P 500 retracement (down 5.5% from the March 28 high to April 19)—reminding investors that markets do not always go up and to the right—the index snapped a 3-week losing streak and staged a 2.7% rebound through the Friday April 26 close.
Initial jobless claims for the week ended April 20 were 207,000 (the lowest level in 9 weeks), a tick lower than 215,000 expected and a signal that the labor market remains in solid shape. Meanwhile, new home sales (seasonally adjusted and annualized) in March were 693,000, well above 669,000 consensus and up 9% from last year, and pending home sales increased 3.4% juxtaposing the estimated 3% decline according to the Bloomberg consensus. While housing data was decent, sales activity remains restrained by low inventory and affordability challenges.
1Q 2024 U.S. GPD was expected to come in at around 2.2% according to economists surveyed by Factset, yet the reported 1.6% GDP was not only well below that estimate, but the slowest pace since the 2Q 2022 print (which was -0.6% on an extremely high prior-year comp stemming from the economic recovery from the pandemic). Combined with the hotter-than-expected inflation report last week (core CPI up 3.8%), the dreaded “S” word (stagflation) has even made an unwelcome resurgence in financial commentary.
On the one hand, the Fed’s “restrictive” (by chair Powell’s own words) policy seems to be impacting consumer spending (slowed to a 2.5% increase from 3.3% in 4Q 2023) and other GDP inputs, yet on the other hand it may not be fully having the desired effect of lowering inflation to the 2% target. That sounds like a scary predicament, and indeed it would be. . .but let’s not get ahead of ourselves. After all, GDP did still expand, and the reasons for the soft print were mostly attributed to higher imports vs. exports resulting in an ~6% higher trade deficit than 4Q 2023 (imports are subtracted from the quarterly GDP calculation). Alternatively, if the soft 1Q GDP report actually is a harbinger of deteriorating economic conditions, additional confirming data ought to force the Fed to favor a less restrictive policy stance in the future. (Of course, we would much prefer well-controlled inflation to be the impetus for future rate cuts.) In all, bond yields remained broadly elevated, with the 2-year Treasury settling at the psychologically significant 5% threshold on Friday.
Elsewhere, 1Q 2024 earnings results have been solid overall: among the 46% of S&P 500 companies that have reported results through April 26, 77% of them topped Factset consensus EPS estimates. This week was jam-packed with earnings reports including four of the so-called Magnificent 7 (TSLA, META, GOOG, and MSFT). Although actual results and price action between the mega-cap tech companies varied, a common thread between them all was an increase in expected capex, primarily in support of their respective AI capabilities.
Finally, perhaps the most impactful market-moving data of the week was the PCE report released Friday morning. Core PCE—the Fed’s preferred inflation gauge—came in at 2.8%, just a tick above the 2.7% estimate. (PCE readings have been lower than CPI, which overweights housing relative to PCE.) After assessing the influx of new data, we maintain that “higher for longer” rates followed by an eventual rate cut or two remains the most likely outcome. While we do not find there to be compelling evidence that a dramatic shift is in the offing (after all, the current Fed target funds rate of 5.25%-5.50% is well above core PCE of 2.8%), we note that some forecasters and traders have actually started predicting a hike as the next change to monetary policy, with futures pricing in a ~20% chance of a rate increase within the next 12 months.
A new episode of The World According to Boyar podcast will be out Tuesday. Stay tuned!
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