The stock market experienced a volatile start to the second quarter, with the major indices settling with decent losses. The Dow Jones Industrial Average dropped 2.3%, the Russell 2000 fell 2.9%, the S&P 500 declined 1.0%, and the Nasdaq Composite slipped 0.8%.
This downside bias was fueled by a sharp increase in market rates amid solid economic data and sticky inflation figures. The 10-year Treasury note yield jumped 12 basis points to 4.33%, while the 2-year note yield rose 10 basis points to 4.72%.
The February Personal Spending and Income report, released last Friday, showed some persistent inflation pressures in the form of the PCE Price Indexes. Other data points, like the March ISM Manufacturing Index and the March employment report, reflected the ongoing strength of the economy. However, the March ISM Non-Manufacturing PMI and weekly jobless claims report hinted at some softening.
Market participants were recalibrating rate cut expectations following this week’s data and commentary from Fed officials. Minneapolis Fed President Kashkari (not an FOMC voter) drew attention by suggesting the Fed might not cut rates this year if progress on inflation stalls. The implied likelihood of a rate cut in June is a toss-up, having fallen to just 52.4% from 60.4% one week ago.
Increased geopolitical tensions in the Middle East, related to Iran’s potential retaliation against Israel, contributed to the negative bias this week, in addition to some normal consolidation efforts after the strong start to the year.
US Market Highlights
- Payrolls surged 303K in March, widely beating the consensus forecast of 200K. Average hourly earnings rose 0.3% for the month and 4.1% for the year, in line with estimates. The unemployment rate declined to 3.8%.
- JOLTS job openings increased to 8.76 million in February after the Labor Department revised January’s numbers to 8.75 million. The job openings to unemployment ratio fell to 1.36 from 1.43.
- The ISM reports that both manufacturing and services expanded last month. Its Manufacturing PMI jumped to 50.3% (vs 48.5% estimate) while its Services PMI remained in growth territory at 51.4% (vs 52.8% estimate).
- Tesla’s first-quarter vehicle deliveries plummeted 9% as the company cited factory shutdowns, shipping diversions, and the arson attack at Gigafactory Berlin as part of the reason for the faltering sales.
- Disney won a proxy fight against activist investor Nelson Peltz after a shareholder vote, handing CEO Bob Iger a major victory over one of Wall Street’s most aggressive investors.
- UPS will replace FedEx as USPS’s primary air cargo provider in a roughly $2 billion hit to FedEx’s top line. USPS was the largest customer for FedEx’s air-based Express segment.
- Intel’s foundry business sees a $7 billion operating loss for 2023 as the segment’s revenue declined 31%. The company has been investing heavily to catch up to its chipmaking rivals, TSMC and Samsung.
- J&J to acquire Shockwave Medical in $12.5 billion deal as it aims to broaden its portfolio of heart-related medical devices. This follows J&J’s acquisitions of Abiomed and Laminar for $17 billion and $400 million, respectively.
- Medicare Advantage plans to see 2025 base pay fall in a blow to the health insurance companies grappling with higher medical costs. UnitedHealth, Humana, CVS, and Centene’s shares fell an average of 8% this week.
Global Highlights
- Biden and Xi talked about conflicts in Ukraine and Taiwan as the two world leaders aimed to manage the strained U.S.-China relationship. Xi emphasized that “Taiwan is the first red line that must not be crossed.”
- China’s factory activity expanded at the fastest pace in 13 months in March with the Caixin Manufacturing PMI jumping to 51.1. Meanwhile, the Caixin Services PMI rose to 52.7, notching the 15th straight month of growth.
- Eurozone inflation unexpectedly slowed to 2.4% in March, setting the stage for the ECB to cut rates in June. Excluding food & energy, core inflation cooled from 3.1% to 2.9%, also coming in below expectations.
- Economic activity in Europe begins to recover, which is led by higher levels of services. The HCOB Composite PMI rose to 50.3, with the southern European economies leading the way while Germany and France continued to lag.
- Taiwan was hit by its strongest earthquake in 25 years, killing ten people and injuring thousands. Taiwan’s earthquake monitoring agency said the quake was 7.2 magnitude while the U.S. Geological Survey put it at 7.4.
- BYD to launch its first electric pickup truck this year as the Chinese EV giant aims to compete with the likes of the Ford F-150 Lightning, Toyota Hilux, and the Tesla Cybertruck.
- McDonald’s will buy all 225 stores from its Israel franchise following months of dramatically lower sales due to pro-Palestinian boycotts. The restaurants have been owned by Alonyal Ltd. for more than 30 years.
Investor Takeaways
As an investor, staying informed and adapting to the ever-changing market conditions is crucial. This week’s data and events have provided valuable insights into the state of the economy and the potential direction of monetary policy. Here are a few key takeaways:
- Inflation remains a persistent challenge, as evidenced by the sticky PCE Price Indexes and the Fed’s cautious stance on rate cuts. Investors should brace for higher rates for longer, which could impact various asset classes differently.
- The labor market remains tight, with strong job growth and a low unemployment rate. This could further complicate the Fed’s efforts to tame inflation without causing significant economic disruption.
- Geopolitical tensions can introduce volatility and uncertainty into the markets, especially the energy sector, particularly in the Middle East and between the U.S. and China. Diversification and a long-term perspective are essential for navigating these challenges.
- Sector performance has been mixed, with energy and communication services outperforming, while healthcare, real estate, and consumer staples lagged. Investors should consider rebalancing their portfolios to align with their risk tolerance and investment objectives.
Commodities & Crypto
Energy
Oil rose for the fourth week running, pushing Brent above the $90 a barrel mark. This 18% rise since January 1 could complicate the task of central bankers working to curb inflation. OPEC+ maintained its grip on global supply by not altering production quotas, while Saudi Arabia raised its official selling prices for Asian buyers. Geopolitical tensions in the Middle East remain high following Israeli strikes in Syria targeting Iranian interests.
Metals
The price of copper reached a new annual high this week at $9,256 per tonne. China intends to reduce its copper production to eliminate the surplus by penalizing its smelters. Other metals like aluminum, zinc, and lead also saw gains. Notably, gold broke the $2,300 barrier for the first time, as its price is extremely sensitive to the direction of the Fed’s monetary policy.
Crypto
Bitcoin is down more than 5% this week, trading around $67,000. Despite this fall, Bitcoin Spot ETFs continue to accumulate positive net flows, albeit significantly less than in March. The funds issuing these ETFs, led by Grayscale, BlackRock, and Fidelity, have accumulated over $57.56 billion in assets under management, or 4.31% of bitcoins in circulation. Other cryptocurrencies like Ether, Solana, Binance Coin, and Cardano followed Bitcoin’s downward trend. However, the entire crypto-asset market’s valuation is still up by more than 55% since the start of the year.
Calendar & Movers
All eyes this week will be on Wednesday’s consumer price index report for March. Headline CPI is expected to rise 0.4% on a M/M basis, flat from February, and an increase of 3.1% on a Y/Y basis, slightly lower from +3.2% prior. Core CPI is seen decelerating on both a M/M and Y/Y basis to +0.3% and +3.7%, respectively.
Additionally, investors will be looking out for the minutes of the Federal Reserve’s March meeting, also scheduled for Wednesday. Following last week’s hot labor market data that dented interest rate cut odds, market participants will be closely watching the minutes and the consumer inflation report for further clues about the future of monetary policy.Next week will mark the start of the first quarter earnings season as well.
- Earnings spotlight: Monday, April 8 – Lotus Technology (LOT)
- Earnings spotlight: Tuesday, April 9 – Neogen (NEOG), PriceSmart (PSMT), and Tilray Brands (TLRY)
- Earnings spotlight: Wednesday, April 10 – Delta Air Lines (DAL), Applied Digital (APLD), and Rent the Runway (RENT)
- Earnings spotlight: Thursday, April 11 – Constellation Brands (STZ), CarMax (KMX), and Fastenal (FAST)
- Earnings spotlight: Friday, April 12 – JPMorgan Chase (JPM), Wells Fargo (WFC), BlackRock (BLK), and Citigroup (C)
As the legendary investor Peter Lynch once said, “Investing is fun, exciting, and it can be very profitable if you do it correctly.” With the right knowledge, discipline, and a long-term perspective, we can navigate the complexities of the financial markets and achieve our investment goals.
