Investment decisions made in the next two months have the potential to determine portfolio performance over the next two years. The current market conditions are being driven entirely by macro factors and are expected to be highly volatile. Although some investors may claim to ignore macro views, they are essential, especially considering the end of the global central bank rate rise cycle.
The view that cash rates have peaked is playing a significant role in the resilience of global equity markets. In light of the continued issues in the global banking system, US equities performed well, and financials and consumer discretionary sectors underperformed. Defensive stocks such as utilities, staples, gold, and healthcare outperformed the broader market. The S&P500, the Dow, and Nasdaq all recorded gains for the week, benefiting from defensive rotation from all things financial.
With five long-duration tech companies representing a combined 22% of the S&P500 Index, it is evident that they are benefiting from defensive rotation from financials. The Fed’s aggressive rate hike cycle has reduced activity and inflation, with data showing all economic and inflation data is expected to weaken sharply over the next few months. Money market inflows have accelerated, reflecting the bank deposit flight, and data suggest that household demand for US equities has been negative YTD.
The scramble to money market funds is expected to be both “the peak of fear” and the peak of the Fed Funds rate. As a result, the bond markets are pricing a pause at the May 3 Fed meeting, followed by 25bp cuts on June 14, July 26, Sept 20, Nov 1 pause, and Dec 13. This will take the year-end FFR down to the 3.75% to 4.00% range. The Fed and the bond market are no longer a headwind but a tailwind for risk assets, led by the equity asset class.
In conclusion, equity markets have bottomed for this cycle, and it is crucial to make investment decisions over the next two months with these factors in mind, as they may determine portfolio performance over the next two years.
