Investment environment overview 03/2024

March proved to be yet another great month for investors, with precious metals firing on all cylinders and oil prices confidently gaining ground, making energy the best performing sector in the S&P 500 by far (up almost 9% month-on-month). European equities managed to outperform their U.S. counterparties with Europe Stoxx 600 Index gaining 3.7%. S&P 500 rose by 3.1% and closed the first quarter of 2024 with a 10.2% gain. The Nasdaq 100 is up 5.3% for the Q1, though March was rather mundane for the so-called Magnificent Seven, with information technology and consumer discretionary showing the weakest results among all S&P 500 economy sectors (though all 11 sectors gained). March was favorable for small- and mid-caps – S&P MidCap 400 gained 5.4% for the month, bringing its YTD return to 9.5%, while the S&P SmallCap 600 was up 3.0% in March (+2.0% YTD). Asian markets had a decent month too, with Chinese equities rebounding amidst good earnings reports, though the latter part of the month was spoiled by the weak data from Alibaba.

The Magnificent Seven vs. The Gang of Four

The Magnificent Seven, which now constitutes 29% of the S&P 500 Index, accounted for 37% of its YTD return, but a new “Gang of Four” has emerged, as Nvidia, Microsoft, Meta Platform and Amazon.com accounted for 47% of the YTD return of the S&P 500 (and now constitute 18% of the index). Interestingly, Tesla is down 29.3% since the beginning of the year and is now the worst performing company in the index, with Boeing being the second worst (-26.0% YTD), while Apple is down 10.9%.

European and US equity markets

Source: Bloomberg and Signet Bank

March was a good month for fixed income markets as well, with high yield and investment grade assets showing similar results. Inflation appears to be stabilizing, even though at higher levels than most of central banks would have preferred. Hence some analysts voice their concerns regarding this persistent inflationary pressure, as it could dampen the prospects of a long-awaited bull market in bonds, advocating for short-term bonds over their longer-duration equivalents.

Benchmark 10-year bond yields

Source: Bloomberg and Signet Bank

Precious metals continue to roll on

FX markets are still rather boring to our taste, not able to decide on the road to take. March saw little change in major currency pairs, while dollar ended the month with marginally higher readings. EUR/USD is locked in narrow price channel for more than a year now, and it is only a question of time when the accumulated energy will be released, so we just keep waiting for the directional clues.

Precious metals are a hot topic again. Gold closes at all-time highs every other day, so, for now, we keep our red line / stop-loss at XAU/USD 1970 mark and expect this bull run to keep the momentum going. However, should the market hit the $2400 per troy ounce directly with no retracements, we will most probably take some chips off the table. Silver managed to take out the $26-27 per troy ounce zone, and now there are hardly any hurdles ahead of XAG/USD 28-30 resistance area, where the market could run into some difficulties, which finally should give way for much higher levels. Meanwhile, XAG/USD 24-25 levels should act as a strong support / buying zone.

Oil and natural gas should still be considered as the hardest markets to deal with, but we continue to think that natural gas is extremely cheap, so we definitely like keeping small portion of our longs in this commodity. Oil prices look like trying to build a decent local bottom, so we feel comfortable with having positions in both oil ETFs and energy sector stocks.

High Yield bond Indexes

Source: Bloomberg and Signet Bank

Well, one might definitely say that in comparison to cocoa beans even crypto currencies and precious metals look dull in recent months. Yes, the move from $3500 to $8500 per metric ton was stunning and the speed and magnitude of it really exceptional. Hot money loves such stories (remember timber futures during Covid-19 times?), thus heavily accelerating the trend at final stages of the rally. Now, with this trading idea completed, speculators will search for similar ones, so why not choose something that goes well with chocolate… coffee, anybody?

Goldprice, USD/oz

Source: Bloomberg and Signet Bank

China expands, ECB readies for a rate cut

The expansion of the U.S. services industry decelerated, as indicated by the decline (from 52.6 in February to 51.4 in March) in the non-manufacturing Purchasing Managers’ Index (PMI). This slowdown in growth was accompanied by a decrease in services inflation, as shown by the survey’s measurement of prices paid for inputs by businesses, which dropped to 53.4 in March from February’s 58.6, the lowest level since early 2020. Layoff announcements in the U.S. increased by 7%, reaching the highest level since January 2023. The rise was primarily driven by job cuts in the technology and government sectors. However, despite this uptick, the total number of layoffs announced so far this year is down by 5% compared to the same period last year, indicating a relatively robust job market.

Manufacturing activity across Eurozone experienced a deeper contraction compared to February. The final HCOB’s Manufacturing PMI dropped to 46.1 from 46.5 a month ago. Despite factories reducing their prices at the quickest rate since November of last year, new orders declined for the 23rd consecutive month. During the same period, business activity in the Eurozone saw expansion for the first time since May 2023, primarily driven by robust performance of the dominant services industry, which counterbalanced a more pronounced decline in manufacturing. The Services Purchasing Managers’ Index surged to 51.5 from 50.2, marking its highest level since June. Inflation declined, reinforcing the argument for the ECB to initiate reductions in borrowing costs. Consumer price growth across the block eased to 2.4% in March, down from 2.6% in February, with prices of food, energy, and industrial goods all contributing to pulling down the headline figure.

China’s manufacturing activity saw its most rapid expansion in 13 months, accompanied by a surge in business confidence to an 11-month high. The Caixin/S&P Global manufacturing PMI increased to 51.1 from 50.9 in February. Additionally, there was an uptick in external demand, driving the indicator for new export orders to its highest level since February 2023. Furthermore, China experienced an acceleration in services activity in March, marked by an increase in new business at the swiftest rate in three months. The Caixin/S&P Global Services PMI inched up to a 52.7 reading from 52.5 in February. This uptick was attributed to improving underlying demand and initiatives aimed at enhancing new order generation, resulting in the most rapid expansion of new business since December of the previous year.

What’s next?

With the S&P 500 posting eight new closing highs in March, the key question for most investors remains “what to do now”? With such a superb first quarter of 2024, investors and traders showing no sign of abandoning the market, and some new money coming in (and a lot more waiting on the sidelines), decent earnings, possibility of rate cuts increasingly likely (especially compared to probabilities of rate hikes), recession concerns easing together with inflation fears (at least in the short to medium term), unemployment remaining low and consumers seemingly willing to spend their hard earned dollars, euros and pounds, what could possibly go wrong? Apart from revised numbers, which usually come less impressive than initial readings, equity valuations in the U.S. are incredibly stretched, while upcoming presidential elections in the U.S. and growing debt of developed economies (never mind wars) are adding to risks and uncertainties. Over the next few months markets can definitely extend further and deviate even more from their “normal” valuations, but we do not advise to be lured into current buying spree, remaining patient and picky with our investments.