Window Dressing
By Crest Capital Advisors on March 28, 2024
Dow: 0.84% to 39,807.37
S&P 500: 0.39% to 5,254.35
Nasdaq: (0.30%) to 16,379.46
Russell 2000: 2.54% to 2,124.55
10 Year Yield: 4.20%
Outperformers: Utilities 2.80%, Real Estate 2.20%, Energy 2.20%, Financials 1.70%
Underperformers: Communication Services (0.80%), Information Technology (0.10%)
US equities ended mostly higher this week with strong outperformance in the Russell 2000 and some minor weakness in the Nasdaq. Treasuries were mixed with the curve flattening. The Dollar index was slightly stronger with the biggest currency story being the yen touching its weakest point since 1990. Gold was up 3.6%, continuing its rally and reached new all-time highs this week while WTI crude rose 3.2% amid heightened tensions in Ukraine and the Middle East.
You know it is a minimal headline and shortened holiday week when we are talking about the largest moves being in currency and commodities. Today also had the distinction of being the last trading day of the week, month, and quarter all on the same date. The market navigated a shortened trading week deprived of any meaningful catalysts with most looking to PCE this Friday (delivering a key economic data point during a market holiday) and Nonfarm payrolls next Friday. This week saw little change in the broader bullish market narrative focused on June rate cut from the Fed, a firmer macro backdrop, and AI secular growth. The overall equity market held up despite some outsized selling in tech and end of month-/quarter rebalancing.
Speaking of month and quarter end, US equities were higher in March, with the major indices all gaining. The S&P 500 logged its fifth straight monthly increase, finishing higher for the 10th month of the past 13 and setting multiple fresh record highs along the way. It also marked the second straight quarterly double-digit percentage gain for the S&P 500 and its best performance to start a year since 2019. The Nasdaq just missed out on what would have been a fourth double-digit percentage gain in the last five quarters. For the quarter, Treasuries came under pressure with 2-year yields up 37 basis points to 4.62% and 10-year yields up 40 basis points to 4.20%. The probability of a June rate cut stood at just over 60% late in the quarter, while the market was priced for just under 70 bp of rate cuts in 2024 (down ~100 bp from the peak early in the year).
Just Don’t Call It Transitory
Inflation is 3.4% or lower in every single G7 country. The average is just 2.7%! Now we know the financial media and many at the Federal Reserve are still worried about a repeat of the 1970s (a period where inflation spiked, ebbed dramatically, but then re-accelerated into a 2nd wave), but we’re reiterating our call that the inflation scare is officially over! After all the criticism levied at the Fed (including from us) for using the term “transitory” in 2021, we finally know it was indeed transitory after all. The chart below would indicate to us that it was…it just took longer than impatient, short-term-oriented investors were willing to accept.
Private Markets for the Win
Clients of ours know that we have been long time advocates for the opportunity to generate differentiated returns in the private markets. For decades now, private equity returns have outperformed public equity returns by a sizable margin. And it seems some big institutional investors are taking notice as well as one of the world’s largest pension funds announced plans to shift another $34 billion into the private markets…
CalPERS will be moving from a 13% limit on private equity to 17%-22%. And take private credit from 5% to 8%. Public equities and fixed income will be reduced to pay for it. “Strong and ongoing growth in private equity returns is behind this measured and appropriate increase,” said CalPERS trustee David Miller, chair of the investment committee.
Speaking of Private Equity returns, we came across the graphic below which measures recent historical returns by fund size and quartile ranking. It would seem to indicate that smaller funds from the best-performing managers have produced the largest margins over public equities. Overall it argues that manager selection is critical and on this front, we believe Crest Capital is well-positioned to assist.
Corporate Efficiency
Another positive for stock market fundamentals is that S&P 500 operating margins continue to expand, now sitting at 16.9%. This is the highest level going back to 2008 outside of the post-covid recovery. As we have written many times in the past, as long as profit margins are expanding, the market doesn’t often get into too much trouble.
Irrational Markets
Naturally, the nominal price of a stock should, at least in theory, have little to do with its performance. But examining the data since 2010 reveals that the stocks of companies that split their shares outperformed the broader market by a meaningful margin in the two months following the effective date. One of the latest names to announce a large stock split is Chipotle (Ticker: CMG).
Now, we do not know whether Chipotle’s decision to split its stock 50:1 (one of the largest splits ever!) will usher in a new wave of the practice but we think it is worth watching for two reasons:
1) in the past, a wave of stock splits was often associated with a significant increase in stock speculation; and,
2) it would be a boon for institutional brokers who get paid on a cents-per-share basis (more volume of shares being traded for the same notional dollar amount).
The average price of a stock in the S&P 500 is off its highs but still rests at nearly $160, more than four times the average price of a share in 2008 before the crisis. Plenty of room for more stock splits.
Cuckoo for Cocoa
It’s not only Sonny the Cuckoo Bird, but traders these days cannot get enough chocolatey goodness. Supply shortages saw cocoa futures surge well past the $9,000 per ton level on Monday as a record rally that started in early 2023 shows no sign of letting up. In fact, cocoa beans are not only now more expensive than other popular commodities like copper, but recent returns also outpace popular investments like Nvidia (NVDA) and Bitcoin over the past month (+47%) and on a year-to-date basis (+130%). Look at that price chart below and you’ll be forgiven if you thought it was the price of Nvidia!!
Cocoa production has been dented by severe weather and crop disease in Ghana and the neighboring Ivory Coast, which together are responsible for 70% of global output. The bad news is satisfying your sweet tooth is going to cost a bit more until prices return back to earth.
Politicians Love Leverage
Global government debt now sits at a record $82 trillion, up $20 trillion since Covid, and up $50 trillion since Lehman. This marks a 7x increase in just this century, accomplished in less than 25 years! The bad news is there is not enough income to tax to bring this down. The good news is markets still don’t seem to be phased by the increase.
Economic Funnies
Happy Easter!
Crazy Stat of the Week
Here are this week(s) crazy stats!
- As of this week, the S&P 500 has been higher 17 of the past 21 weeks and has returned 27% to investors during this period. This type of weekly win rate (81%) has never happened before in history!
- The S&P 500 has produced successive positive months in January, February, and March just 20 times since 1950. This year will make it 21 times. The rest of the year (final 9 months of trading) performance for the S&P 500 over these prior 20 instances saw additional positive returns generated in 19 of the 20 time periods. The average return was 9.8%.
Quotes of the Week
“Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price.”
-Michael Mauboussin
Calendar of Events to Watch for the Week of April 1st
With the markets closed for the Good Friday holiday tomorrow, we take a look at next week’s US events but also anticipate a re-adjustment/reaction on Monday morning on the back of the rare release of a market-moving news release on a stock market holiday (The release of the February PCE…the Fed’s favored measure of inflation…comes on Good Friday). On the US Economic Calendar, we get data readings on Durable Orders, JOLTS Job Openings, and US Factory Orders early in the week with the main highlights focused on labor markets later in the week. The Nonfarm Payrolls report on Friday morning will be the highlight as earnings news is on hold until the official start of Q1 earnings reports a few weeks from now.
Monday 4/1 – The ISM Manufacturing for March is expected to tick up to 48.5 from last month’s 47.5 reading. February Construction Spending is also expected to rebound up 1.2% from a -0.20% contraction in January.
Tuesday 4/2 – The JOLTS Job Openings report for February is anticipated to come in slightly lower at 8.7m openings from 8.863m last month. A continued gradual decline in the number of openings is likely something the Fed will want to see before acting on interest rates. We’ll also get February Factor Orders data which is expected to show a 1.0% increase, much better than January’s -3.6% decline.
Wednesday 4/3 – The ISM Services for March is expected to remain around prior month levels at 52.7. Still firmly in expansion territory…not too hot and not too cold. The ADP Private Sector Employment Report will also get attention with economists forecasting a net 152.5k new jobs, up from 140k last month. Looking overseas, Eurozone Inflation data will be released for March and economists are expecting a 2.5% year-over-year headline rate (down a tick from 2.6%), but a fairly elevated 0.9% month-over-month increase.
Thursday 4/4 – The weekly jobless claims data will continue to be scrutinized for any weaknesses in the labor market. So far, these data releases have been cooperating with the soft-landing narrative.
Friday 4/5 – The highlight of the week will be the March Nonfarm Payrolls Report. Economists are expecting 180k net new jobs, down from last month’s 275k level. The unemployment rate is expected to tick back down to 3.8% from 3.9% last month. Average Hourly Earnings are expected to increase by 0.3% month-over-month and 4.1% year-over-year.
Source: MarketWatch