03 Apr Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | +3.5% |
| Nasdaq | +3.2% |
| Aussie All Ords | +3.3% |
Stocks added to gains last week as traders continued to bet the Fed is almost done raising rates. But volatility in these expectations has been extreme for the past month
At the start of February, the market was projecting a Fed Funds Rate of 4.25% in January 2024. As shown above, by March 8th, futures pricing was projecting a rate of 5.66% as the higher-for-longer narrative became entrenched.
Then SVB happened and within a week rate expectations had dropped 2% to 3.69%. As we end Q1, rate expectations are right where they started February at 4.25%.
That implies two rate cuts in the second half of the year.
Which is what is driving the switch back to growth stocks
This table is from Bespoke Research
The first quarter of 2023 saw growth significantly outperform value. The best performers were high priced, large cap stocks that had fallen the most in 2022.
Which all makes sense. The story in 2022 was all about interest rates rising, whereas the story is now about rates falling in future.
The Nasdaq was up +20.5% in Q1 and that means it is back in a bull market.
But taking a look under the hood and things don’t seem quite as rosy.
Consider this fact, the S&P500 is up +5.5% year-to-date. But that is all down to just these
- Apple +26.9%
- Microsoft +20.2%
- NVidia +90.1%
- Alphabet +17.2%
- Meta +76.1%
- Amazon +23.0%
- Tesla +68.4%
The total contribution from these stocks to the S&P’s YTD performance is 7.3%. It means without them, the index would be negative for the year.
You will also notice in that list that the stocks that got sold down the most in 2022 are the ones that have performed the best in 2023.
Nvidia was down 50% in 2022, Tesla was down 65% and Meta was down 64%.
2023 has been great for those of you who held through the drawdowns of 2023. But I can’t see where any gains come from here.
April is traditionally a good month for stocks. The second best in fact, after December. It will probably be a good time to reduce exposure as the month goes on, because this idea of rates falling in the second half of the year is just wrong.
Fed Chair Powell himself said “just don’t see rate cuts this year”
Last week we had a few other members talking to the press.
Richmond Fed Barkin said “if the Fed backs off too soon, inflation may come back stronger” also “if inflation persists, the Fed can raise rates further” and “comfortable hiking rates now in 25bps increments” but he has “no preference” for May’s rate move “given the uncertainty”.
Boston Fed Collins said “some additional tightening is needed to lower inflation” the banking system is “strong and resilient” and notes “quite a bit of strength in the labor market” and “need to hold rates high all year to lower inflation”
Minneapolis Fed Kashkari “could take a while to fully get through bank strains” and “the services economy outside of housing has not yet slowed down”
Quite where the market is getting this idea from beats me. And if rates do stay high, that will be a headwind for Tech stocks.
The only way the Fed cuts rates this year is if we enter a recession. But in recessions, earnings fall, which would be a headwind for Tech stocks.
Whichever way it plays out, Tech is going to have to put up some big earnings numbers if stock prices are going to hold their gains.
This is why I think trimming exposure is the best course of action.
So if now is not the time to buy large-cap tech, what can you buy?
Mid-caps and small-caps were down 3-5% in March, mainly because these sectors have bigger weightings to Financials and Energy. You don’t want to be buying small cap Financials, but large-cap are fine. A report out last week showed regional banks lost $120bn in deposits but large cap gained $64bn. Still, the upside to large cap banks isn’t attractive enough to warrant significant weighting in your portfolio.
I’ve been beating the energy drum for a long time now and still see attractive ideas in the space. The reason I like energy is because I can’t see the price of oil falling significantly. Ok, it did fall to $64 last week, but then OPEC gave a surprise announcement and said they are cutting production by $1m barrels a day. That sent Oil straight back to $80 a barrel.
OPEC don’t want to be selling oil low and can basically control the price. It just isn’t going to drop.
So here is another idea in the space, a little different and will appeal to income investors.
VNOM – Viper Energy Partners. The structure is a bit complicated but basically this company is run by DiamondBack Energy – one of the best shale oil producers. It finances their exploration and takes a cut of sales in doing so. That cut gets paid out as a dividend and expected yield this year is just shy of 9%.
Also, look what is happening in Semiconductors
The coming week will be light on news and will be shortened by the Easter Holiday on Friday so we are not expecting much action. The next significant event will be Q1 earnings in a couple of weeks’ time.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.