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Market Insights – Week Ending May 3, 2024

May 06, 2024

Key Takeaways:

  • Busy week with mega-cap earnings, employment data, and the Fed’s interest rate decision.
  • The Fed alleviated near-term rate hike worries, but left uncertainty around timeline for rate cuts.
  • Apple (AAPL) and Amazon (AMZN) reported positive Q1 results, lending support to mega-caps.
  • Labor market data showed sufficient softening without adding to broader economic concerns.

 Market Summary –

The first half of the week was met with hesitation as market participants awaited several market-moving events including key earnings releases, the Fed’s interest rate decision, and April’s jobs report. After mixed action across the board, the S&P 500 ended the week in positive territory hovering just below its 50-day moving average. Positive bias was revived mid-week with the Fed holding rates unchanged in response to persistent inflation and commentary from Fed Chair Powell easing market worries of another rate hike. Equity markets found further support from out-sized gains in mega-cap names following strong earnings releases from both Apple (AAPL) and Amazon (AMZN), along with strength in semiconductor stocks. Economic data for the week was mixed as April’s employment report was weaker-than-expected, backing optimism for the market’s soft-landing expectations. On the fixed income front, treasury yields moved lower throughout the week and gave a further boost to equities as the 2-yr and 10-yr note declined to 4.81% and 4.50% respectively.

Fed Policy & Economy –

The Fed’s decision to hold rates unchanged at 5.25-5.50 was largely expected with most of the focus being on Fed Chair Powell’s commentary regarding the potential for another rate hike after persistently sticky inflation continued to weight on sentiment. While Powell ultimately reined in market fears regarding another hike, broad uncertainty remains on the timing of rate cuts as we approach mid-year. As we conclude this year’s third FOMC meeting, the Fed has maintained its outlook for three interest rate cuts before year-end as the expectation is for inflation to decline towards the Fed’s 2% target.

Early in the week, negative bias was sparked by an increase in the employment cost index, which hinted at inflationary concerns from accelerating compensation costs. On Wednesday, April’s ISM manufacturing index dipped to 49.2% (below 50% is considered contractionary), signaling slowing manufacturing activity and product demand. While the market was less than thrilled with either of these, most of the attention was placed on the Fed and, subsequently, the April jobs report on Friday. The takeaway was that the labor market showed signs of further softening with an increase in the unemployment rate to 3.9% (still at historic lows) and a smaller-than-expected increase in the number of jobs created at 175,000 (consensus 243k) from 315,000 in March. Market participants interpreted the weaker-than-expected employment report as a positive in terms of increasing the likelihood of rate cuts without causing excessive concern for the broader economy.

Earnings –

As it stands, equity markets seem content with the uncertainty placed by the Fed as long as the economy remains strong enough to be supportive of earnings growth and the soft-landing view that has propelled the recent rally. On the earnings front, 80% of the S&P 500 has reported Q1 results with 77% of those reporting positive earnings surprises (Source: FactSet). While broad-based earnings strength was expected, the bar was particularly high for the mega-cap companies that have driven gains over the last year. Apple (AAPL) and Amazon (AMZN) were put to the test with each providing positive results.

  • AMZN reported positive Q1 results with operating income increasing a notable 221% from the prior year to $15.3Bln. While the company showed strong growth in all segments, investor focus continues to be on Amazon’s cloud-computing segment, AWS (amazon web services). Following Microsoft’s strong performance in its Azure cloud segment, Amazon's AWS grew 17% from the prior year with revenues touching $100Bln, driven by continued momentum in AI efficiencies improving costs and overall customer experiences.
  • AAPL reported earnings roughly in-line with expectations with iPhone sales holding up. The company increased their dividend, which was a psychological win for investors; but a majority of the stock’s upside was likely due to the stock’s price being suppressed for a majority of the year. The report was satisfying enough for investors to quell near-term fears and spark some buying interest in anticipation for the company’s annual Worldwide Developers Conference in June, in which investors are anxious to hear AI-related developments from Apple.
  • Apple is also one of Qualcomm’s (QCOM) largest customers, which also reported positive earnings. Previously hindered by low demand for handsets, the wireless-focused semiconductor company has seen revitalized growth stemming from AI-related demand in higher-end smartphones. QCOM found notable strength from China, its largest market accounting for over-half of the company’s overall revenue. Looking forward, management expects support for global handset growth along with increased demand for its Snapdragon processors, which facilitates the latest AI-technology in smartphones. The upbeat earnings report was a boon for Apple and other semiconductor companies as well, as it demonstrated enthusiasm over AI is alive and well. In contrast to the excitement over the internet during the dot-com era of the 2000s, AI-technology has thus far shown its ability to drive tangible growth and revenues. Continued signs of AI-demand will likely translate into positive sentiment leading up to Nvidia's (NVDA) earnings report near the end of May, as well.

Charts of The Week – But What About the Inverted Yield Curve?

We often mention the pitfalls awaiting investors who try to time the market or forecast macro-economic events. This sentiment is top of mind as doomsayers have been called for a recession and market crash for nearly two years, in which the market has only rallied to record highs. While our investment philosophy avoids trying to forecast market events and instead focuses on planning and investing in quality companies, we remain aware of the uncertainties looming.

One of these considerations is the time-honored recessionary signal of an inverted yield curve – in which short-term bonds yield more than long-term bonds because of higher interest rates designed to combat inflation. It also is traditionally a negative for economic growth as higher short-term yields increase borrowing costs and generally pressure lending growth.

In fact, every recession has been preceded by an inverted yield curve, but not every inverted yield curve has preceded a recession. Mark Twain is often quoted as saying, “history doesn’t repeat itself, but it often rhymes.” To be sure, this time is different. The economy has remained exceedingly strong in the face of the Fed’s eleven consecutive rate hikes with built-up consumer savings providing a cushion against elevated inflation. Earnings have remained resilient as companies have largely adjusted to higher inflation.

If history does rhyme and an eventual recession is in the cards, it does not benefit you to try and forecast when, where, or how. Recessions are historically short-lived relative to the long-term gains experienced before and after. We also see them as an opportunity to invest even more. Below is a great chart showing that even in some of the worst years for the equity market, not only has the market ultimately ended the year higher, but subsequent years have shown overwhelming positive returns.



Week Ahead –

This week, we have relatively little economic or earnings-related events. Outside of the Consumer Sentiment survey on Friday, several Fed members will provide commentary throughout the week along with a handful of notable earnings reports as earnings season dwindles down. For the most part, the market will likely fluctuate on investor sentiment, technicals, and any geopolitical developments as we await the next round of inflation data for April on May 15th.

 

As always, if you have any questions or comments please do not hesitate to reach out.

 

Respectfully,

Michael Neill, CFA


   

   

Sources:

Chart 1 - Reuters, LSEG

Chart 2 - JPM Guide to the Markets - FactSet, Standard & Poor’s, J.P. Morgan Asset Management.

Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2023, over which time period the average annual return was 10.3%.

Guide to the Markets – U.S. Data are as of April 30, 2024.