Three things investors may not know, but should

Three things investors may not know, but should

The first quarter of 2024 was a good quarter for Wall Street. But the market has since slumped, as investors lose confidence in the possibility of multiple interest rate cuts this year.

Hot inflation data has pushed much-anticipated rate cuts by the Federal Reserve further into the calendar, and geopolitical turmoil is also weighing on investors.

Still, there is one upside – the US economy remains robust, and the Fed appears to be done with rate hikes.

So how do investors weigh these pros and cons?

“April’s turmoil coupled with this still-constructive backdrop for risk-taking points to an increasingly complex investment environment,” wrote Michael Arone, SPDR chief investment strategist at State Street.

Arone spoke with Before the Bell to outline three things about the market right now “that investors should know, but probably don’t.”

1. Small and mid-cap stocks have outperformed large-cap stocks recently.

2. The dominance of the Magnificent 7 is a myth so far this year.

3. Long-term US Treasuries have delivered negative performance for the first time.

This interview has been edited for clarity and length.

You write that investors may be surprised to hear that small- and mid-cap stocks have outperformed large-cap stocks over the past five months. Why do you think it’s surprising, and what does it say about the market?

Most investors think that the S&P 500 has outperformed everything else, largely dragged down by the performance of the Magnificent 7 (Amazon, Tesla, Alphabet, Meta, Apple, Microsoft and Nvidia). I think it will come as a surprise to many investors that mid-cap and small-cap stocks have actually outperformed since the last time the S&P 500 hit its recent lows, which was in late October. Ultimately what happened was that the (US) Treasury decided to issue Treasury bills instead of longer coupon debt. That started to push interest rates down, and then the Fed suggested that they might cut rates, and that led to this massive rally. The big beneficiaries of that, I think, will be a surprise to most investors – mid-caps and small-caps.

That’s right. But things have changed since then, and now we don’t know when the Fed will actually cut interest rates. Do you expect small and midcap stocks to continue to outperform or do you see that changing?

As that has changed and a rate cut is now expected, the S&P 500 has reclaimed leadership from mid-cap and small-cap stocks. But I think that the Fed will cut rates later this year, and when that happens, and rates start to fall, things will pick up again. It has proven to be a catalyst in the past, and I think it will be in the future.

So as an investor, I may not know exactly when the Fed is likely to cut rates, but I’m sure it’s coming, and why not buy the stock when it’s relatively unpopular and while it’s cheaper than large-cap stocks. It gives me the opportunity to diversify away from the Magnificent Seven and invest in something that is relatively cheaper, and has historically done well when rates go down.

You say that the focus of the market and the Magnificent 7 is a myth so far this year. Why is that?

Finally, if market benchmarks are weighted by market capitalization, it will always be the case that the largest stocks have the greatest influence on both risk and return. That’s not really news. But when I look at the performance of specific sectors so far this year, things like industrials and financials and energy have outperformed technology. Communication services have done well, but that is not a strong support for the Magnificent 7. When I look at other benchmarks like the EuroStoxx 50, and also some Japanese equity measures, they have done the same as the S&P 500 and in some ways better.

I think that there is a case to be made that, at least this year, different sectors have done well and different markets around the world have done well. Sure, if an investor only owns the S&P 500, they are highly driven by the risk and return of the Magnificent 7, but most investors have diversified portfolios where they own other things. Some other things have been done very well, like gold, for example.

You also find that since the rate hikeir the Fed in July, long-term Treasuries have delivered a negative performance – for the first time. The sound is quite noticeable.

The usual pattern is that the Fed raises rates, which we see them doing from March 2022 to July 2023, which eventually slows the economy and cools inflation, and then, the Fed has to respond by cutting rates and rates. fell For the first time, that’s not the pattern — rates are actually up, not down.

When we look at yields, they basically contain three things — expected growth, expected inflation and this little thing called the “term premium.” What happened was that growth was much better than the market expected, inflation was much stickier than investors expected and finally, because we ran such a large deficit, the Treasury had to issue more debt than they currently have. . But the Fed and other traditional buyers of Treasuries are buying less, so supply rises while demand falls. As a result, rates are higher, not lower. This is the first time it’s happened, ever.

The Fed announced last week that it would begin winding down its quantitative tightening program. Does that change anything?

You’re seeing some downward pressure on the 10-year Treasury yield today. Fed Chairman Jerome Powell said last week that we don’t expect there to be a rate hike. So, it’s a matter of cutting rates, but when?

Economic data is chilling; The latest GDP figures show that the US economy is growing at a slower pace. That should put downward pressure on yields. If the Fed is easier on monetary policy, that should help. What continues to be a bit of an outlier is sticky inflation. But eventually, if the economy continues to slow, yields should actually fall.

Now, the thing is, the inflation part is complicated. There are a number of things that I think complicate the final level of inflation. There is a supply-demand imbalance, and things like the housing market, the labor market; we’re trying to make this multi-decade transition from fossil fuels to something else, which is proving to be more inflationary than people expect. You have geopolitical conflicts, which have raised the price of oil. And given the deficit, the Treasury needs to keep issuing more bonds. So, I think the component may maintain a higher rate than market expectations. That doesn’t mean that rates will continue to rise, it just means that the market expects them to drop sharply. I’m not sure.

Warren Buffett held Berkshire Hathaway’s first meeting without Charlie Munger
Welcome to “Woodstock for capitalists.”

Tens of thousands of Berkshire Hathaway shareholders and Warren Buffett fans are flocking to Nebraska this weekend to pick up Berkshire’s See’s Candies and Dairy Queen Dilly Bars, compete in newspaper throwing contests and, perhaps most importantly, to see the Oracle of Omaha speak in person. .

This year, however, the event took on a more serious tone. Buffett appeared for the first time without his longtime business partner and friend Charlie Munger, who died in November.

Greg Abel, Buffett’s expected successor to run Berkshire’s non-insurance operations, and Ajit Jain, who runs the company’s insurance business, joined Buffett on stage. However, Munger’s kind words and wise (and often sarcastic) words were absent.

Berkshire also reported first-quarter 2024 earnings on Saturday morning. Buffett famously releases his quarterly report over the weekend so investors have time to fully digest its contents before trading reopens on Monday.

Berkshire’s operating profit rose to $8,825 per Class A share. Berkshire’s Class A shares have risen nearly 10% this year, outpacing the S&P 500’s total of 7.5%.

It closed the first quarter with a net profit of $12.7 billion, less than half of the $35.5 billion it reported for the same period last year.

Retailers raise prices and squeeze consumers. They might just blink
Retailers are on edge, reports my colleague Parija Kavilanz. Consumers don’t shop like they used to. In the game of chicken between stores and shoppers, it’s the stores that seem to pay off first, by lowering prices on thousands of products.

The price cuts come as inflation has pushed prices higher for the past two years, squeezing Americans and forcing them to choose between wants and needs.

That’s a problem not just for individual shoppers or large retail chains but for the entire American economy, about two-thirds of which comes from consumer spending.

A number of retailers in recent weeks have announced price cuts as they seek to lure consumers into stores and entice them to spend money on items such as new clothes, home decor and arts and crafts or hobby kits.

Ikea has reduced prices on hundreds of products. In April, an 18-piece dinnerware set at Ikea was marked down to $29.99 from $49.99, a glass door bookcase is now $189 down from $229 and a bed frame with storage and headboard is $499 down from $549.

It’s telling that this is a category that’s considered a discretionary purchase, meaning things that are nice to have but may not be daily necessities in the same vein as groceries and medicine.