Asset Management
04/01/2024 Market Strategy
April 01, 2024
Sustainability is the Word
Last year through this year’s Q1, the operative word has been “resilience.” With results having so often surprised to the upside in Q1, a call for “sustainable resilience” seems best.
Key Takeaways
- We discuss the impact of exchange rates on investor returns.
- Last week’s economic data showed the Fed’s preferred measure of inflation –the PCE deflator—moderating in February from January. Consumer confidence data showed resilience in March as the gains of the recent few months were sustained.
- This week brings the first measures of economic data for March, including the ISM purchasing managers’ surveys and the nonfarm payrolls report (jobs gained and the unemployment rate).
The fundamental resilience that surprised many if not most investors in Q1 now in our view requires sustainability through Q2 to maintain current levels and add opportunity for further upside. Coming into this new quarter, economic data will likely carry the day-to-day action in the market until Q1 earnings season begins in earnest on April 12, when the big banks begin reporting results.
This week will provide investors with a brace of key economic data tied to manufacturing, services, home sales, unemployment, employment, and job growth. The data should provide clues as to the sustainability of the economic expansion currently gracing the US economy as well as some clues as to what direction the market may choose to take as a result.
This year’s first quarter not only surprised purveyors of the bearish view on the economy and the markets but also the bulls. The rally in equities became empowered by rotation, rebalancing, and fundamentals (earnings) that saw the rally broaden across the 11 sectors of the S&P 500 as well as among market capitalizations and style (growth vs. value), rewarding an array of both cyclical and defensive stocks.
In our view, investors’ expectations as to when, where, and how much the Fed will cut this year are likely best kept right-sized near term.
The information technology and communications services sectors eased their near singular grip on investors’ mindsets in Q1 as other sectors, market capitalizations, and investment styles benefited from a sense (supported by economic data and comments by central bank officials throughout the quarter) that the Federal Reserve felt it was indeed getting closer (if not yet there) to pivot away from the current tightening cycle and towards the beginning of rate cuts.
Inflation data throughout recent quarters as well as other economic results have provided a fairly clear signal that while significant progress has been made by the Fed in curbing the pace of inflation, it remains sticky enough to keep rate cuts from becoming imminent.
In our view, the strength in the economy and US corporations (reflected by the S&P 500 in particular) has helped the markets navigate the disappointment some investors felt over the course of Q1 as the Fed pushed back a number of times on market expectations for rate cuts as early as March.
With March now in the rearview mirror, chances for a pivot by the Fed in June appear to us somewhat subdued in comparison to what had been expected earlier this year as reflected in the futures market. In our view, investors’ expectations as to when, where and how much the Fed will cut this year are likely best kept right-sized near term.
Investors Extending Point of View
As 2024 has moved along, a number of international markets in Europe, Asia and in Latin America have increasingly garnered investor attention. A number of foreign central banks are moving toward or are already lowering their policy rates.
Investor interest in foreign stocks and bonds has increased this year as economies and markets worldwide begin to anticipate changes in monetary policy around the world as the pace of inflation begins to ease further.
We remain overweight US equities at this time while keeping meaningful exposure to both international developed and emerging markets.
For US investors, it’s important to keep in mind the effects of currency fluctuations on returns and income streams from foreign securities held in US-based portfolios. Here are several thoughts for our readers’ consideration:
A rule of thumb to consider is that a strong dollar tends to reduce returns in foreign securities (held in US dollar based portfolios) with weak underlying currencies when “translated” or converted back into US dollars. (Note that return calculations exclude applicable costs.)
Conversely, a weak dollar can enhance returns in securities and income streams from strong underlying currencies versus the dollar when converted or “translated” back into dollars. A number of ETFs that hedge currency positions in foreign stocks are available for investors to consider when investing abroad and the dollar is showing strength.
The US dollar as tracked by the BBDXY (Bloomberg US dollar index) has experienced some volatility this year as investors weigh the direction of US monetary policy and its effect on the dollar (see p. 6 ahead for the BBDXY illustrated).
As of last Friday, the BBDXY index showed the US dollar up 2.6% from the start of the year against the basket of currencies tracked by the index. Expectations in the market are for the dollar to weaken against the basket as the central bank nears an actual rate cut with the effect of lower rates stateside likely reducing the attractiveness of US debt and other securities.
It’s important to remember that many companies in the S&P 500 that have global operations and are well positioned to benefit from a weakening in the dollar.
We remain positive on equities and continue to see fixed income securities as complementary to stocks in providing portfolio diversification.
Some near-term profit-taking in the day to day action of the market, particularly in growth segments that have had exceptional run-ups since last year into this year, continues to appear to us quite normal. Such activity combined with a process of rebalancing and rotation into other segments of the stock market in our view can be healthy and contribute to the broadening of the markets’ progress from last year through this year.
Near term volatility could in our view continue to present opportunity for investors to “catch babies that get thrown out with the bath water” in periods of market downdrafts as the market digests levels of uncertainty that are not uncommon to times of transition like these.
Name:
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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