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April was quite unfriendly to most of the asset classes. The major U.S. equity indices showed significant declines: the Dow Jones Industrial Average lost 5.0% of its value, the Nasdaq 100 lost 4.5%, the S&P 500 fell 4.2%, and the Russel 2000 declined 7.1%. The bond market also experienced some pressure, with yields on 10-year U.S. Treasuries rising nearly 50 basis points to 4.7%. The reason – inflation does not want to go down, and the consumer price index remained at the annual rate of 3.8%, while the producer price index rose to 2.4% from the previous annualized reading of 2.1%. The GDP growth figure for Q1 was a bit of a relief as it showed the economy grew by 1.6%, which nevertheless fell short of analysts’ expectations of 2.5%. The Federal Reserve announced that it will reduce its positions in Treasury bonds slower than previously planned, which also restrained the growth in yields.
Microsoft, Apple, Google
The biggest negative pressure on the Nasdaq 100 and S&P 500 indices was exerted by Microsoft Corporation, as its fall (by 7.6%) cost the Nasdaq 100 almost 122 points and caused more than 28 points of damage to the S&P 500. At the same time, Alphabet Inc. announced the first dividend payout in its history, and also the repurchase of its own shares in the amount of $70 billion (64% of the company’s free cash balance at the end of 2023). Following the announcement, the company’s stock surged 10%, marking it the second biggest one-day rally since July 2015, when Alphabet Inc. shares jumped 16%. The company’s shares were the top performers in the Nasdaq 100 and S&P 500 indexes, contributing 72.7 and 15.8 points, respectively. Apple Inc.’s results weren’t quite as remarkable, almost entirely in line with market expectations. Just like its competitors, the company announced plans to repurchase $110 billion worth of shares this year (almost 68% of the company’s free cash balance at the end of 2023).
European and US equity markets
Source: Bloomberg and Signet Bank
On stock buybacks and the semiconductor industry
It seems that share buybacks will become one of the main contributors to market growth in 2024. According to Goldman Sachs analysts’ forecasts, the volume of buybacks by companies included in the S&P 500 index may amount to $925 billion (13% more than in 2023), and in 2025 it may reach $1.08 trillion. Whether companies will massively spend their accumulated cash on buybacks, time will tell. If the recession, so expected at the beginning of the year, does come knocking at the door, the market will perceive the spending of cash to buy back shares as a negative factor.
The earnings report of the Dutch company ASML Holding, a near-monopoly manufacturer of printed circuit machines for microchips, needs to be mentioned separately. The company announced a 4% decrease in revenues and decrease in orders. The market took this statement as a signal that the entire microchip industry may soon experience a decline in production volumes. The company’s CEO hastened to calm the market by saying that the decline in volumes is temporary, and the positive effect of subsidies for new production in the U.S. to Samsung and TSM is expected soon. However, ASML Holding’s share prices are still under pressure, indicating that the general wariness of players following the industry remains.
High Yield bond Indexes
Gold and silver retreat after reaching their price targets
With no real changes in FX and energy markets, precious metals continued to make headlines, though experience shows that it is not necessarily the good news, as overexcitement usually leads to losses, at least in the short term. Last time we wrote that “Should the market hit the $2400 per troy ounce directly with no retracements, we will most probably take some chips off the table”, and that is pretty much what happened, with XAU/USD finishing the month slightly below 2300 mark. Similarly, silver touched the very highs of the XAG/USD 28-30 resistance area, but was fast to retreat to $26-27 per troy ounce zone. Now it needs to build up pressure at these levels for a clear and convincing breakout, but this process will demand patience (as it always does with commodities). In our opinion, the picture looks very constructive still and bull trend in silver (and platinum) is yet to get a strong footing, while gold rally is closer to becoming mature.
Gold price, USD/oz
Good news from Europe; U.S. economy suffers in April
The services sector in the U.S. shrank in April, with the non-manufacturing purchasing managers’ index (PMI) from the Institute for Supply Management dropping from 51.4 to 49.4, which is the lowest level since December 2022. Services inflation seems to have rebounded despite a slowdown in
demand – according to the poll, input costs rapidly increased from 53.4 points to 59.2. Following a short expansion in March, U.S. manufacturing shrank in April due to a reduction in orders – manufacturing PMI fell from 50.3 to 49.2. Again, the index of prices paid by manufacturers in the poll increased sharply from 55.8 in March to 60.9 in April, the highest score since June 2022.
April saw the fastest expansion of business activity in the Eurozone in nearly a year – the S&P Global HCOB composite PMI for the currency union increased to 51.7 from 50.3 in March, largely due to a recovery in the bloc’s leading services sector, which more than offset a continuing decline in manufacturing. Despite producers slashing prices, the Eurozone manufacturing sector continued to decline as seen by HCOB’s final manufacturing PMI, which dropped another half a point to 45.7 as a result of declining demand. April saw no change in the 2.4% inflation rate across the 20 nations block. According to Eurostat, core inflation, which excludes volatile prices for food, energy, alcohol, and tobacco, decreased to 2.7% from 2.9%.
The expansion of China’s services sector slowed somewhat in April due to rising expenses, although the number of new orders increased – the Caixin/S&P Global services PMI decreased to 52.5 from 52.7 in March. The Caixin/S&P composite PMI, which measures the manufacturing and services sectors together, stood firm at 52.8, which is the highest level since May 2023. On the other hand, the National Bureau of Statistics manufacturing PMI fell to 50.4 in April from 50.8 in March, indicating a slowdown in growth in China’s manufacturing and services sectors.
The correction has come on time
Overall, looking at equity indices, it is likely that April has formed the first corrective wave, the continuation of which we may see in May or June. The market, in our view, is still expensive – the forward P/E ratio for the S&P 500 index is 20x, while the long-term average is 15.7x. In addition, interest rates just “don’t want to go down”. We are still waiting for a corrective move in major indices: S&P 500 to the 4,900 – 4,800 area; Nasdaq 100 to 16,500 – 15,700; Russel 2000 to 1,700.
At the time of writing, new non-farm payroll data had already been released, which totaled 175,000 in April while 243,000 were expected. The publication of this data also contributed to a slight decline in yields, but it is too early for bond investors to cheer. Despite the fact that in late April the U.S. Treasury shared its plans to raise $1 trillion, which did not exceed market expectations, many are beginning (or rather continuing) to think about the future budget deficit: it is expected to reach 6.1% of GDP in the next decade (against current 5.6%), and the total size of public debt is expected to grow to $48 trillion. In the short term, however, the market gives investors the opportunity to buy one-year government bonds with an annual yield of 5.2%, and long-term bonds with a yield of 4.5-4.7%.
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