What happened last week
- The second quarter opened with a whimper as stocks declined and the U.S. Treasury yield curve bear steepened.
- Strong economic data, and especially Friday’s job growth release, contributed to higher interest rates.
- A spike in geopolitical risk led to rallies of almost 5% for crude oil and gold and weighed on equity sentiment.
What we’re watching this week
- Economic data: Wednesday’s Consumer Price Index (CPI) release could support or refute a recent increase in market-based inflation expectations.
- Earnings: The GSIBs (e.g., mega-banks like J.P. Morgan) will kick off 1Q ‘24 earnings season on Friday.
- Geopolitics: Despite the uptick in risk in the Middle East last week, we think there is a path to a ceasefire that may de-escalate tensions in the region.
Horizon’s Investment Management Views
Markets started the new quarter with a choppy trading week that saw U.S. equities end lower and the trends of the last year reasserting themselves. Hawkish Fedspeak, strong economic data, and elevated geopolitical risk caused a move up in yields which was led by longer maturities. This bond price action, as well as lower risk appetite, weighed on equities last week, especially interest rate sensitive sectors of the market like small-caps. Meanwhile the U.S. energy sector soared by nearly 4%.
Last week’s data supports our long-held view of underappreciated strength in the U.S. economy – Friday’s beat of ~90k jobs in net March job creation was the highlight. In our framework, that is supportive for equity markets. However, elevated geopolitical risk outweighed the bullish economic data last week, and near-term risk for markets is higher than usual given the back-to-back double digit quarters for the S&P 500. As we head into a week with numerous important catalysts, the key levels to watch for this week are 4.5% for the 10-year yield and $90 for WTI crude oil.
On the macro front, Wednesday’s U.S. CPI print is the highlight of the week. Oil prices have been on the rise since last December; we are monitoring how the higher energy costs impact the breadth of inflationary pressures. The risks to yields are two-way on this release, but in the bigger picture we maintain that stocks will eventually look through yield moves so long as the Fed is still committed to cutting rates at some point this year. On Friday, the banks will kick off 1Q ‘24 earnings season. The bar for earnings is high, but we won’t get reports from the firms that have led the market higher for another few weeks. The geopolitical situation in the Middle East remains fluid, but recent developments have increased the probability of de-escalation.
CPI = Consumer Price Index. GSIB = Global Systematically Important Banks. WTI = West Texas Intermediate crude oil. The commentary in this report is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device. Before investing, an investor should consider his or her investment goals and risk comfort levels and consult with his or her investment adviser and tax professional. Equities are represented by the S&P 500 Index which is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. It is not possible to invest directly in an index. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such.
Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC.
