Last week was another good week for risk markets, and also for the US Treasury bond market for a change. I suppose we can give credit to the Federal Reserve and its central bank brethren, which largely delivered as expected at their respective policy meetings but with a decidedly dovish “tilt”. Even the Bank of Japan, which raised its overnight bank rate for the first time since 2007, provided an almost apologetic explanation, ensuring investors that it would move extremely cautiously from this point onwards. Rather than the “hawkish” pivot by the BoJ spurning a stronger Yen and a sell-off in stocks, the effect was exactly the opposite – the Yen weakened back above ¥150/$1.00, and the Nikkei 225 tacked on a further 5.6% gain for the week to reach another record high, adding to its already extraordinary performance over the past year. Similarly I suppose, even though both the Federal Reserve and the Bank of England held firm on their policy rates, both central banks were crystal clear that rate cuts were coming. This was enough to send US and UK stocks soaring, with the S&P 500 reaching yet-another record high on Thursday, and the FTSE 100 (+2.6% WoW) nearing 8,000 as it closes in on its all-time high (Feb 2023).
European stocks also rallied strongly, as it appears increasingly likely that the Fed, the BoE and the ECB are “converging” on a plan to serve up the first reduction in their policy rates in June, although I would be slightly surprised – given the different trajectories of inflation and economic growth – that they would move in tandem. The FX market seems to be sending different signals, as both Sterling and the Euro weakened vis-à-vis the US Dollar. In this respect, I find the FX market a better harbinger of the future. You have to look no further than recent data releases concerning inflation (US data hotter-than-expected the week before last, UK inflation better-than-expected this past week) to conclude that the US economy remains on substantially better footing and – as a result – probably also faces a tougher “fight-to-the-finish” to see inflation back to the coveted 2%/annum level.
I will dig deeper into these and other market events that mattered last week further below, but let’s first look at the summary of markets for the week.
As the table indicates, the Fed’s decision and the aftermath also settled sentiment in the rates market, as US Treasury yields fell across the curve. As far as assets other than stocks and US Treasuries, corporate credit continued to grind tighter, a statement that is getting so repetitive it is hardly worth repeating week in and week out. Clearly, there is nil sign of concerns about credit deterioration among corporate bond investors. Gold about held onto its gains, while Bitcoin – believed by its followers to be a “store of value” – took it on the chin. Oil prices were down a touch, certainly a relief to President Biden in this important election year.
Portfolio allocation and relative value across equity markets
Risk markets have been so strong since mid-October that it is hard to believe. However, it reinforces my investment mantra (not advice, etc) that you simply cannot afford not to have your portfolio skewed towards equities – especially US stocks – if your time horizon permits. On the point of US equities, I grabbed below a graph from an article in #Bloomberg last week that compared the returns on the S&P 500, the STOXX 50 (Europe) and the FTSE 100 since the beginning of 2018.
This chart assumes local currency to local currency, but if you adjust for cross-currency exchange rate movements, the picture is even worse for the FTSE 100 and the STOXX 50. To provide some perspective, $10,000 converted to local currency and invested in each index five years ago (and adjusted for currency movements)[1], and then re-converted to US Dollars, would now be worth:
S&P 500: $19,443, +94%
STOXX 50: $13,030, +30%
FTSE 100: $9,506, -4%
As I wrote on X yesterday (I am on X here and you should follow me please), I pity the investors that have not been invested in US stocks over the past decade or more, and certainly those that have instead opted for UK stocks. (To perhaps make those investors wed to the FTSE feel slightly better, I will point out that these are index returns only rather than total returns, so they exclude dividends.)
WHAT HAPPENED LAST WEEK THAT MATTERED
Equity news
There are four things worth mentioning as far as US equities last week.
The first is the successful IPO of social media company Reddit (RDDT), a company with a small albeit loyal following. The IPO was priced Thursday morning at $34/share and opened mid-day on Thursday following the IPO at $47/share. As of 310pm DST on Friday, the stock is trading at around $49/share. The solid early gains in RDDT provide hope that similar tech companies might once again (and more easily) gain access to the public equity markets via IPOs.
Secondly, the US Justice Department announced that it is suing Apple (AAPL) for anti-trust / anti-competitive practices, which sent the shares lower when announced. As of the last hour of trading on Friday, the shares are roughly flat WoW, but they did give back some nice gains from the early part of the week. This suit might drag on for months if not years. Worst case is it might result in a large fine and / or the end of what the Justice Department considers to be Apple’s anti-competitive practices. Best case is that Apple might emerge unscathed but certainly will potentially suffer from the distractions of dealing with this suit as far as its focus and business evolution.
Thirdly – and I say this with a completely straight face – Donald Trump’s social media company Truth Social will be merged into shell-company Digital World Acquisition Corp (DWAC), a listed SPAC (remember those?), with the new company apparently being named Trump Media (symbol naturally DJT). Mr Trump will own 58.1% of the new company, touted to “be worth billions.”. What I find amusing is that Truth Social had revenues for the first three quarters of 2023 of a mere $3.38 million (not billion!) and a net loss of $49 million. How can those financials generate a market value of anywhere close to $6 billion to $7 billion? Plenty of investors feel the same, as the short interest is 11%.
Lastly, two well-known apparel companies – Nike (NKE) and Lululemon (LULU) – declined sharply on Friday after posting better-than-expected bottom line earnings but warning on current-quarter sales, which look to be sharply weaker than forecast, especially for LULU. As of press time, LULU is down 15% on the day, and NKE is down 6%. I will look at LULU more closely since I own the shares, to see if this is a re-adjustment to fair value or if the stock is over-sold. LULU is still valued at over 6x sales with a forward P/E of 33x, not cheap for a retailer of any type.
Central bank decisions
I covered these in the introduction, but in case you want to read more, I have provided links below, including to the Federal Reserve’s Summary of Economic Projections which are worth a read to see how the Fed expects the US economy to perform in the next few years. It also includes the much-written-about dot plot.
Bank of Japan “Change in the Monetary Policy Framework”, March 19th
FOMC Statement, March 20
Federal Reserve Summary of Economic Projections, March 20
Bank of England Monetary Policy Summary, March 21
UK inflation
UK inflation for February came in lower than expected, which is part of what contributed to the sharp 2.6% rally in UK stocks this week. The 3.4% YoY rate (headline) for February was a sharp decline from the 4.0% rate the month before. Similar to Europe and the US, the “problem child” as far as inflation in the UK remains services (running at 6%/annum), an after-effect of the pandemic. However, it seems central bank leaders world-wide believe that services inflation is in the process of subsiding as the structural nuances in the labour market caused by the pandemic continue to right themselves. The February UK inflation report from the ONS is here.
Anti-obesity drugs
Let me provide a shameless plug – if you haven’t read my three articles on anti-obesity drugs, you should. You can simply go to my blog and read them in order. You might care if you are over-weight or obese (70%+ of Americans), or if you want to capitalise on the mega-trend that is driving two stocks in particular – Eli Lilly (LLY) and Novo Nordisk (NVO). Or if you own them already, you might _ for example – want to know that LLY has a higher forward P/E ratio that NVIDIA (NVDA). Yikes!!
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
[1] Starting date assumed to be January 1, 2018, and ending date March 22, 2023. I used cross-currency FX rates as of each of these dates, too.
_________________
**** Follow E-MorningCoffee on Twitter, and please like and comment on my posts right here on my blog. You need to be a subscriber, so please sign up. Thanks for your support. ****