What’s New
If April showers bring May flowers, then perhaps investors can rejoice that April is over and look forward to better times in May.
US equities struggled last month, with the S&P 500, Dow Jones Industrial Average, and Nasdaq all falling by 4.16%, 5.00%, and 4.41%, respectively. While earnings releases are to blame in some cases, the broader picture continues to be one of rising sovereign rates acting as a headwind to equity market returns.
Rates were likely driven higher by a number of factors, including inflation and a still-resilient US economy.
Regarding inflation, the Consumer Price Index (CPI) reported in early April ticked up to 3.5% and led to a further pricing out of rate cuts from the Fed this year.
The market had been pricing three cuts by the end of 2024, with the first coming in June, prior to the release. By month-end, we were down to one cut on the year, likely in September. At issue is the fact that core services inflation has stalled well above trend – and has now modestly accelerated. Resuming the downward trend here will be key to allowing the Federal Reserve (Fed) to declare victory in its fight against inflation.
While economic growth showed a marked deceleration from last quarter, domestic consumption in the form of consumer spending and fixed investment continued to plug along at a healthy clip. This combination of sticky inflation and a resilient US consumer likely pushed yields higher through the month, with the 2-year and 10-year US Treasury yield rising by 41 basis points and 48 basis points, respectively, to 5.03% and 4.68%.
Our Perspective
Much like last month, we continue to see risks to markets. Rising rates may yet again begin to pressure borrowers, especially small and medium-sized businesses. Inflation is no longer falling at the pace it was, highlighted by core services inflation ex. shelter which has stalled out at a level well above pre-COVID levels.
Meanwhile, valuations are far from attractive at a broad level, and it leaves us wondering what many market participants are playing for.
However, we have continued to find opportunities in the market.
Although the market is pricing in a soft-landing scenario, we believe that one is unlikely as we progress through the economic cycle. Historical evidence suggests that the Fed has never brought inflation down from the levels we’ve seen without causing significant economic hardship.
With only one cut planned for the year, we’re closely monitoring for signs of weakness and what it all can mean for the start of a rate-cutting cycle, as we prioritize risk management with a defensively positioned strategy in our core portfolios.
AI’s Five Minutes of Fame?
Is Artificial Intelligence (AI) having its five-minutes of fame… or is there more to the story?
We have been following AI at Manning & Napier for decades, and despite the recent buzz, AI is not a new concept.
Scientist Alan Turing wrote the first AI manifesto, “Intelligent Machinery” in 1948. Eight years later, Dartmouth College held a workshop where the term “artificial intelligence” was coined to describe machines that could simulate human behavior. AI has undergone continuous cycles of development, disillusionment, and progress in the decades that followed. Each iteration has built on the work of the previous cycle, getting closer to a state in which machines will achieve full parity with, and ultimately exceed, the capabilities of the human mind.
Years of experience lead us to believe that we still have a way to go before we reach that final state. Research firm, Gartner, developed a five-stage visual framework for technology hype cycles. A new technology emerges, generates tremendous enthusiasm, and then falls short of inflated expectations. Eventually, practical applications emerge and mass adoption takes hold.
Continue reading our thoughts in the full article: The AI Hype Cycle.
Our View
Economic Cycle | The economy is in a late cycle, though it continues to prove incredibly resilient. The Fed hiked aggressively and we saw significant pain in industries including transport and manufacturing. However, the US consumer has remained strong. We believe that the lagged effect of monetary policy may start to be felt in other parts of the economy in the coming quarters. | |
Stock Market | Sentiment now appears stretched and valuations are not compelling. To date, market returns have been driven by multiple expansion. EBIT margins climbed to historical highs in the years following COVID lockdowns; elevated input costs and weakening demand and pricing power are posing a risk to the ability of corporations to maintain earnings at their projected level. Returns will be harder to come by and stock selection will be increasingly important. | |
Bond Market | Interest rates remain well off their lows, as the economy has remained resilient, and the market is weighing the dynamics of still-elevated core inflation and the potential for interest rates to remain higher for longer. Corporate spreads remain well contained, particularly considering the risks we see to the economy. | |
Important Issues on the Radar | Inflation: Factors including a resilient demand environment and wage increases threaten to keep core services inflation elevated. Should this be the case, the Fed may remain tighter for longer. | |
China’s Economy: China has pivoted on the two key economic issues that acted as severe headwinds to growth over the last two years; however, economic growth appears to be stagnating and it will be critical to monitor the policy response in the coming months. |
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Source: Bloomberg
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Returns for the Consumer Price Index represent an estimate of the average price of consumer goods and services purchased by households, given the market price change for a constant basket of goods and services from one period to the next. Index returns provided by Bloomberg.
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