Monthly Investment Note: May 2024
We’ve seen a change in sentiment on the markets over the past few weeks, driven largely by the change in tone regarding interest rates reduction and the increasing tensions in the middle East.
Markets performed strongly in March, where the energy sector provided the best returns (9.28%) driven largely by higher crude oil prices and a less bleak economic outlook, equities markets have since course corrected slightly.
Indeed, with the first quarter earnings well underway, we saw pullback in the US market which is down about 3% (in Euro Terms) since its high in early April likely attributed to the high valuations, forecasts and some profit taking. This too, is reflected in the Global markets.
Our valuation models continue to observe high side valuations with most well above their historical norms. Some of the headline data which we track is shown in the table below and I have added in the January data for comparison.
| Month | EU Inflation | US Inflation | ECB Rate | Fed Rate | Brent Crude | US 10 Year | Equities YTD | Equities fPE |
| Jan | 2.8% | 3.1% | 4.5% | 5.5% | $81.41 | 4.15% | 6.4% | 17.83 |
| Mar & April | 2.4% | 3.5% | 4.5% | 5.5% | $89.50 | 4.70% | 8.1% | 19.10 |
As the table shows, EU inflation in March continued on a downward trajectory to record 2.4% in March which is a far cry from the 10.6% recorded in October 2022. The relentless impact of current EU interest rate policy is grinding inflation lower successfully, but it is slow progress and the chatter has now turned to whether the EU will actually move to cut rates before the US this year, something which is unusual. Incidentally, Irish inflation data in March recorded a rate of 1.7%, down a full percentage point since January this year.
In contrast, US inflation actually increased slightly in the month of March to 3.5%, which is creating a conundrum for the Federal Reserve….and another headache for President Biden in an election year! Recent commentary on when interest rates will be cut, has abated and the general consensus now is that a US rate cut will occur (if at all) much later in the year.
As mentioned above, energy sector stocks performed well in March & April (up ca. 14.2% YTD) due in large part to the price of Oil which has moved from $81 to $89 a jump of 9.9% from January. Indeed, the price per barrel actually topped $91 pb in early April and with tensions rising daily in the Middle East, the $100 per barrel predictors are back on the scene.
On the fixed Income side, with the US debt to GDP ratio firmly set at 122% and credit rating for US treasuries having been reduced in 2023, there is market sensitivity to interest rate commentary, and one could be forgiven for thinking there would be nervousness to the issuance of new debt. Indeed, in March & April, we saw a sell off of treasuries and the 2 year yield moved from 4.67% to 4.96% with the 10 year yield going from 4.26% to 4.7%. These are big moves in the bond markets but something which we are becoming accustomed to now.
So, while in Europe the current ECB interest rate policy continues to have the desired effect on the rate of inflation, in the US, it does not. With the 2% sweet spot in sight in Europe, it is now time for the ECB policy makers to start thinking seriously about reducing those higher rates to avoid the EU tipping into full recession. Indeed, recent positive data suggests that the Eurozone expanded at its fastest rate in over a year with the preliminary estimate of the HCOB Eurozone composite PMI increased to 51.4, from 50.3 the previous month and well above consensus expectations of a 50.8 figure. The balance faced by the ECB here is too much rate reduction, too quickly and one can imagine a steady round of low interest rate cuts over a long period to control this. In the US however, the message must be to continue interest rate policy for longer than expected until inflation is much closer to the 2% mark than, something which President Biden (and the markets) are not happy about.
As I mentioned in my last update, the challenge to achieve that “soft” landing where inflation peels back to 2% without the economy tipping into recession is a bit like steering an oil tanker, in reverse, into a parking spot at your local supermarket.
Setting macroeconomics aside, what does all this mean for investors?
On the global markets, we continue to see positive returns. In March, this was 11.25% which reduced to 8.1% in April with the afore mentioned correction. This global trend was reflected in all major developed markets with reductions in the US of 2.6%, in Europe of 1.43% and 5.3% in Japan which was the big performer early in the year. It should be noted here that the Japanese Yen is the weakest it has been since the 1990’s trading at about and above the ¥150 mark (¥156.68 / $1 at time of writing) since the Bank of Japan moved from a negative interest rate environment.
Global Valuations as measured by fPE ratios continue upwards moving from 17.83 to 19.1 times forward earnings and indeed in the latest earnings reports, we see that while many companies have delivered beyond the analysts’ expectations, almost all are sounding cautious notes for the remainder of the year…..another contributing factor to recent pullbacks! Year to date returns for the tech bellwether so-called, “Mag-7” stocks are shown in the table below.
| Returns | AMZN | GOOGL | AAPL | NVDA | Meta | MSFT | TSLA | US 500 |
| YTD | 18.6% | 19.1% | -9.4% | 76.7% | 21.8% | 6.6% | -22.3 | 9.40% |
| April | -4.95% | +7.1% | +2.98% | -3.1% | -13.79% | - 5.88% | +10.3% | -1.36% |
| fPE | 43.5 x | 22.1 x | 26.4 x | 35.1 x | 21.7 x | 34.1 x | 74.7 x | 21.74 x |
While five out of the seven have outperformed the broader market for the year so far, Apple & Tesla are the laggards which is being attributed to their lack of product innovation & cost of goods while consumer discretionary spend globally, is reduced. Notably, Alphabet and Meta are trading with fPE’s in line with the broader market while the others are in excess.
However frothy I deem the US markets to be, the fear gauge as measured by the volatility index still continues to bound around the 13 to 15 range; well below the standard of 20 points which indicates volatile markets, last seen in October 2023.
The long-term (10 year) forecast for growth in global stocks has increased slightly to 11% with another slight reduction in the average yield of 2.0% from 2.1% in January. This increases the equity risk premium (the excess return to compensate investors for taking the risk of investing their money in equities as opposed to the risk-free rate) to ca. 5.9%. However, conditions continue to still drive fund flows into the money markets which are currently yielding ca. 3.93% and remain a valuable component of many portfolios.
As always, we take the long view on Investments and are happy with globally diversified portfolios. In today’s (relatively) normal interest rate environment, we see less fair value across global equities with (fPE’s at 19.1) in comparison with early 2023, where valuations averaged 16.6 times earnings. While the markets have roared so far this year, I would suggest again that as the Central bank’s Monetary policies unfurl throughout the course of the year, we can expect to see increased volatility in those capital markets. During these times, it is important to remind ourselves of our investment objective which as always, guides our asset allocation.
For regular long-term investors, our view is to continue to buy into the markets ensuring diversification across sector, jurisdiction, and currency. For lump sum investors, while the conservative portion of portfolios can be bought quickly, a multi-stage approach to the purchase of the equities portion, may be an alternative option.
Our view, on global bonds has also remained as per last month. With, the US 2 year treasury now yielding 4.96%, which is attractive when compared to the average dividend yield of 2.0% for risk assets and slightly more attractive than some money market funds which are paying the 3.93% yield but with the advantage of higher liquidity. Therefore, with bond yields at current levels, and interest rates probably plateaued but set to change, this asset class continues to look a more attractive investment, than in recent years.
Our cautious view on lower volatility portfolios continues to be implemented through the use of money market funds, currently yielding ca. 3.93% and a small allocation to hedge fund positions to exploit market inefficiencies; all in all, providing some degree of protection in the current volatile climate.
Sources: Central Banks: Federal Reserve, ECB, CBOI, Treasuries; Sharepad®. Euro Inflation is measured by the Harmonised Indices of Consumer Prices (HICP). Periodic Market updates & reading materials from Vanguard, Bloomberg, Ruffer, Davy Select & others depending on subject matter. All views and details contained are for information purposes only, are subject to change & should not be construed as advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.
