Investment Update May 7, 2024

Last Week on Wall Street

Economic data for the week included the FOMC meeting ending in no action, as expected. Both ISM manufacturing and services fell back into contraction, while the employment situation report came in weaker than expected. Home prices continued their stretch of gains by several measures.

Stocks gained ground globally last week, with strong corporate earnings, but also weaker economic data that pointed to interest rates eventually dropping down the road. Bonds fared positively along with lower yields. Commodities fell back sharply, as oil prices declined for a variety of market and geopolitical reasons.

U.S. stocks turned the corner on a negative April, with gains last week. Softness early in the week appeared related to poor consumer sentiment and the looming Fed decision. On Wednesday, after the Fed meeting, markets had started down nearly a percent but completely reversed to up a percent by the time the press conference had started, before reversing backwards again. The discussion took on a more rate-friendly tone than expected, highlighted by the answer of rate hikes ‘not really on the table’—removing a key tail risk markets had been worried about. The rally Friday was directly related to a weaker-than-expected jobs report, and moderating wage pressures, that also restrained the ‘too hot’ economy risk and kept hopes for rate cuts alive.

By sector, utilities led the way, up over 3% (based on strong Q1 earnings, lower interest rates, and expectations for rising AI-fueled electricity demand), followed by technology (Apple was boosted by better-than-expected earnings and announcement of a record buyback program), and consumer discretionary (Tesla’s tentative agreement with the Chinese government for use of self-driving technology). On the downside, energy declined -3% along with lower oil prices. Real estate also gained over a percent, in keeping with a drop in yields. Small caps outpaced large caps, getting back into positive territory on a year-to-date basis.

Earnings season has continued to progress, with 80% of S&P 500 companies now having reported for Q1, per FactSet. The blended year-over-year earnings growth rate has come in at a decent 5.0%—the best in a few years—and up from expectations of 3% a month ago. Analysts have also increased EPS estimates more than normal, rather than decreasing them in light of slowdown fears, as was earlier assumed. The strongest earnings growth results have come from communications, utilities, consumer discretionary, and technology—all up over 25% or better year-over-year. Energy and healthcare have continued to lag, each down around -25%. Also interestingly, stocks with more than half of their revenues earned domestically in the U.S. have only seen earnings growth of 0.5%, while stocks with the majority of revenues from abroad have seen 13.2% earnings growth.

Foreign stocks rose last week as well, as sharp gains in Japan and the emerging markets outweighed flattish results in Europe. Euro area GDP came in at a surprisingly ‘strong’ 0.3%, after a year of stagnant growth. It still appears the ECB is poised to cut rates beginning in June, although the pace might not be necessarily quick or substantial given the economic improvement. The Japanese government appeared to intervene in currency markets over the prior weekend, to stabilize the plummeting yen somewhat, although they didn’t admit to it—helping boost Japanese asset returns for the week. Chinese markets were closed much of the week for the May holiday, but exposure through China ETFs saw a sharp rise along with hopes for holiday consumer spending and additional government stimulus, along with stronger manufacturing data.

Bonds experienced gains broadly last week, led by investment-grade corporates, with yields falling towards the end of the week, based on cooling economic and labor data. Foreign bonds fared positively along with a falling U.S. dollar.

Commodities were down broadly last week, despite the weaker dollar, led by energy and precious metals. Crude oil fell by nearly -7% last week to $78/barrel, as signs of some U.S. economic slowing, a fade in Middle East tensions, and higher U.S. supply have weighed on pricing.

Fact of the Week

Venture Global LNG Inc. announced plans to begin production at its second liquified natural gas (LNG) plant in Louisiana in mid-2024, which will be the fourth largest LNG facility in the world (source: Yahoo Finance).