Clearly equity prices have finally begun to be impacted by the inevitable and now relentless climb in interest rates. The current questions are whether stocks and bonds are fairly priced and how long before interest rates decline from their two-decade highs. This note will include thoughts on these issues, but first let’s discuss the performance of our funds and the attribution across the broader markets.
As we’ve often remarked, history rhymes but doesn’t repeat and sure enough, once again, markets remain convinced that the ‘song will remain the same’ this cycle. While both stocks and bonds ‘took it on the chin’ during August until the end of month rally, markets view recent evidence of a softening labour market as a precursor to Fed rate cuts during 2024. At this juncture, this scenario remains a high probability. The questions remain around the timing and extent of rate cuts, the cadence and composition of economic growth, and the subsequent impact on corporate profits and valuation of stocks. This note will delve into these questions, but first let’s recap the performance of our funds.
Equities continued to march higher during July as investors became increasingly confident that the forward macro environment would unfold in a manner helpful to stocks. From the Fed shifting its economic outlook to merely a “noticeable slowdown” from a recession to the extrapolation of the recent dovish news on the inflation front affirming big cuts in interest rates next year, the now 4+ month rally in risk assets was maintained. As can be seen from the far-right of the below relative strength graph of growth vs. value, July’s performance exhibited a more equal balance between growth and value indices.
The 493 ‘other’ stocks in the S&P 500 gained +3.7% during the first half of 2023, a gain that if predicted six months ago, would have seemed reasonable given the mix of macro variables at the start of January. Instead, the S&P 500 (SPX) generated a total return of +16.9%, fuelled by the 70% expansion in the P:E multiple accorded those other ‘7 macro cap tech’ stocks, with the first US$2T market company, Apple Inc., accounting for ~20% of the total gain in the index. Pundits attribute much of the recent five-week ramp in equities to investors’ thirst to be invested when the Fed is done hiking rates and the excitement radiating from artificial intelligence (“AI”).