“The bigger they are, the harder they fall”, a fairly accurate statement that can be extrapolated into the US stock market’s performance last week. The S&P 500 declined for the third consecutive week, with the pain being felt most acutely in the names that have – until recently – fuelled the largely-uninterrupted increase in stocks prices over the last six or so months. For example, two of the stocks that have been the biggest contributors to index gains – NVDA and META – had price declines last week of 13.6% and 6%, respectively. As you might suspect, the tech-heavy NASDAQ was the US index that suffered the most, down 5.5% WoW. Other global stock indices that have recently hit record highs – including those in Europe, the UK and Japan – also came crashing down as sentiment shifted. The only respite seemed to be Chinese equities and the DJIA. And as uncomfortable as holding stocks might be at the moment, the news for bond investors keeps getting worse too as yields continue to march higher as the expectations of near-term Fed rate cuts fades.
WHAT MATTERED LAST WEEK
Data, geopolitics, etc.
Last week had a slew of mixed economic data but generally the themes continued to be a strong and resilient US economy (“US exceptionalism”), a weak European economy, and a sideways (at best) Chinese economy. The geopolitical overlay remained on edge most of the week, but rose on Friday morning following headlines of Israeli strikes inside of Iran. This took the news of ongoing Congressional dysfunction off the front pages, even though the fractured Republican Party can’t get around a common agenda, making its leadership in the House anything but “leadership.” Ah, the entertainment value of American politics is second to none! This confluence of news sent stocks reeling last week as investors headed for safety, pushing risk-off assets like gold and the US Dollar higher, except – of course – for US Treasuries, which continue to be battered by signs of persistent inflation as far as “the last mile” (in terms of getting inflation back to the 2%/annum target).
US Presidential candidates (one of which will be “the next leader of the free world”)
For Americans, the upcoming Presidential election is both a toss-up at this point and rather frightening, an emotion felt by countries around the world, both allies and enemies of the US alike. The reality at the moment is that the American electorate is so polarised that many voters will cast their votes in favour of a particular candidate, not because they like the candidate but more because they detest the other candidate more.
On a lighter note (just), perhaps the most entertaining news of the week was the start of the criminal trial of former President Trump and his hush money payment to porn star Stormy Daniels, which started in New York City last Monday. Although he tried a full litany of stalling tactics to avoid going to trial, Mr Trump eventually ran out of ammunition. Needless to say, the outcome of the trial could have significant implications for the Presidential race currently underway (although I suppose the race is still unofficial). At the same time Mr Trump is starting his criminal trial, the stock of his SPAC-inspired media company – Trump Media & Technology Group (DJT) (operates Truth Media) – has been coming off the boil following the merger’s closing and its stock price pop in late March. The stock is down 45% since March 27th, perhaps because it is massively over-valued (and remains so). I reckon the overlap between investors who believe the shares of DJT are going to the moon and the hard-core MAGA supporter base is very high. Don’t take this as political fodder, but it seems to me that you must have blinders on to either support a Presidential candidate with his baggage or to invest in a stock at this valuation level given the company’s limited history and poor prospects.
Since I stumbled into politics, I suppose I should be fair and provide my two cents on the current administration. President Biden is far from perfect, too. Having said this, the reality of the fairly decent performance of the current administration gets lost in the noise of bipartisan politics (topped with a dollop of sticky inflation). Mr Biden is old to be running for president, and his Vice President Kamala Harris is relatively unknown and virtually invisible. Should something happen during Mr Biden’s hypothetical second term, she would become the leader of the free world. How does that grab you? It is certainly bothering Americans that might otherwise support Mr Biden for a second term. That important issue aside, it seems to be inflation that remains most problematic for Mr Biden as far as the US economy. Inflation concerns trump the fact that the US is outgrowing every developed country in the world, and unemployment remains at record-low levels. I could – and would – argue that it is because the US is able to spend money it doesn’t have, but it is difficult to lay this at the feet of either party because both have continuously squandered opportunities over many years and various administrations to narrow the deficit. That will come back to haunt the US almost certainly at some point, a separate topic I discuss in the next section. Aside from solid US economic performance (inflation be damned), the Biden Administration has rather surprisingly handled foreign affairs very well, including the Ukraine-Russia war and the Israeli invasion of Gaza (and Iranian missiles). I say “surprisingly” because foreign affairs is an area I consider the Republicans more adept at addressing than the Democrats. However, at the moment, cool heads must prevail, not a load of right-wing (generally Republican) bluster about bombing the crap out of _____ (fill in the blank with one of the many possible countries unfriendly to the US).
US fiscal policy (briefly)
Moving on, which is difficult since I am on a roll, the passing recently of OJ Simpson has a parallel with current US fiscal policy – both [got away with / are getting away with] murder. The #IMF, which released its World Economic Report last week, indicated the US federal deficit is likely to increase to 7.1% by 2025, nearly triple that of any other developed economy. American exceptionalism is undoubtedly boosted by the fact that the US can spend money it doesn’t have. Neither party is willing to take the difficult steps to address the deficit, a solution to which will inevitably include tax increases, expenditure reductions, or most likely both. And these will create headwinds for US economic growth. The US is unique in that it does not get punished for fiscal digressions, since it is the beneficiary of a “magic sauce” consisting of a resilient US Dollar and a large, liquid and “safe” US Treasury bond market. Until there are viable alternatives for these, the US will not get punished for fiscal mismanagement. And until the US starts to pay a price, I don’t see the US government – regardless of which party is in leadership – taking the requisite steps. Why should they? Higher taxes and lower government expenses (including defence and entitlement programmes) do not get you re-elected.
Cathie Woods and ARK come to Europe
Despite the highly volatile and generally poor performance of the ARK actively managed family of ETFs over the last couple of years, Cathie Wood is bringing her business focused on disruptive firms to Europe. ARK has experienced sharp outflows of assets now for many months, not surprising perhaps knowing that the flagship fund (ARKK) is down around 73% since its peak in February 2021. Ouch!!
Although the track record of the ARK funds has been poor, Ms Woods apparently identified appetite for her rather unique investment strategy using actively managed ETFs in Europe. European investors are apparently keen to have the opportunity to invest a sliver of their portfolios in a “diversified” group of hand-chosen companies focused on “disruptive technologies”, one of the hottest themes of which is AI. Ms Woods is vocal and expresses her strategy, as poor as the performance has been recently, with conviction. She is a bright business person, and she identified interest in her rather unique strategy on this side of the pond, launching her thematic ETFs in Europe last week. You can read more about the highly volatile performance of the ARK Funds in a #Mornigstar article published last week.
Earnings (and Netflix)
As we head into the core of this earnings season for S&P 500 companies, earnings generally continue to be better-than-expected. However, the bar for earnings in terms of how it translates into stock performance has been raised higher as valuations remain heady, and the all-important post-release guidance – or hints about the future – take on increasing importance.
“Netflix adds 9.33 million customers, crushing forecasts” was the headline on #Bloomberg Friday morning. Customer adds, an important metric for investors, were nearly twice analysts’ expectations. That’s great for the stock, right? Well not so fast! As we are discovering, investors are more discriminating as valuations have soared. Guidance is exerting a much stronger influence on stock price than disclosure of performance in the prior quarter. Along these lines, Netflix’s management was quick to remind investors that the magnitude of subscriber growth experienced in the first quarter is unlikely to be repeated. Moreover, in an effort to focus investors on top and bottom lines (i.e. profitability) rather than sub growth, the company announced that it would abandon reporting quarterly sub growth altogether next year. These disclosures regarding the future went down like a lead balloon, and in spite of the company’s amazing performance last quarter, the stock immediately headed south in the post-market (earnings were announced Thursday after the market closed). Although down 9.1% Friday and 10.9% for the week, the shares have risen a scalding 60.3% since mid-October 2023, so investors should not be too disappointed. (1Q2024 earnings info from company’s website is here.)
MARKETS LAST WEEK
Global equities were down across the board last week except for Chinese equities. Japanese equities took the biggest hit, as the reality of a weakening Yen finally begins to bite. Of course, investors need to remember that the Nikkei 225 is up 29.3% in the last year, and 10.8% YtD. In fact, for all markets that reached record highs in the first quarter (US, UK, European and Japanese equities), it’s not surprising to see a pullback.
US equities were hit hard again last week as data continues to pour in suggesting a strong US economy, which means inflation is unlikely to be on a glide path to encourage the Fed to begin to lower interest rates. This hit the tech-sensitive indices particularly hard last week, as investors left tech stocks and moved into more defensive stocks. This was the third consecutive week that the S&P 500 index has declined.
US Treasuries were hit again by a confluence of economic data, one of the most influential of which early in the week was higher-than-expected US retail sales. Yields widened 9-12 bps across the curve, width total returns on US Treasuries sinking further into the red (7-year total return index down 4.1% YtD and 10 year+ total return index down 9.1% YtD).
Corporate credit markets lost ground last week because of the effects of higher yields and also higher credit spreads, the latter of which to this point have been remarkably stable. Is this a wobble or a sign that investors believe credit conditions might worsen? It’s hard to say at this point, but given the current risk-off sentiment, it is not surprising to see credit come under pressure.
Havens gold and the U.S. Dollar soared, the Yen was hammered, and oil prices were volatile but ultimately ended the week lower. Bitcoin was down 5% WoW, a sharp move in the context of traditional asset classes but “just another day in the office” for the highly volatile benchmark cryptocurrency.
THE TABLES
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and other assets
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