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Market Update
May 7, 2024

April Worst Month For S&P500, As 2024 Races On

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Another month passes as 2024 races on! The chart below, for select asset classes, summarises performance for April and YTD (Year To Date):

The final week of April resulted in the worst month for the S&P 500 (-4.1% in total return terms) and US Treasuries (-2.4%) in 6 months as concerns mounted around inflation and geopolitics.

  1. The Japanese Yen is still the worst-performing G10 currency during April, down over -10% vs US$ YTD. This also hurt the Nikkei in USD terms falling some -9%. It was down -4.9% in local FX.
  2. Safe haven assets benefited from geopolitical tension and the prospect of persistent inflation. Gold rose +2.5% (3rd consecutive month) and the US$ index rose +1.7% (4th consecutive month). 10yr US yields rose 0.48% (48bps) i.e. US10y bonds rose in value while 10yr German Bunds gained +0.29%(29bps).
  3. Commodities showed strong gains in general - copper rose +13.9% (its largest monthly gain since February 2021 due to a supply squeeze).
  4. For reference, the S&P 500 is up +9.7% (total return terms) since the end of 2021. As a comparison, investing in 1-3m T-bills, over that time, would have returned +8.6%.

Today (Friday) saw the release of the April employment data. To the Fed’s relief, it was a much softer number than expected and will. To recap, employment (Nonfarm payrolls) rose +175,000 (forecast: +240,000). March was revised up +12,000 while February was revised down -34,000. The unemployment rate ticked up to 3.9%. Average hourly earnings rose 0.2% m/m to 3.9% y/y. A wider unemployment rate (includes discourage workers and those holding part-time jobs for economic reasons) rose to 7.4%, its highest level since Nov. 2021. Just the day before, the Fed had held its ground on interest rates by deciding NOT to cut them. Rates remain in the 5.25% to 5.50% range. Fed Chair, Powell, said: “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence inflation is moving sustainably toward 2%”. He even went on to say, “there had been a “lack of further progress” in getting inflation back down to its 2% target”. We’re going to need a couple more data points on employment to see if today’s soft number is the start of a trend. Furthermore, to date, all the data is pointing to inflation persisting.

One really interesting indicator is the recently reported same-store sales data for businesses like McDonald’s, Starbucks, KFC, Wingstop, Chipotle and Popeyes (Restaurant Brands International). They give a good sense of how the consumer is doing in an inflationary environment. The first three all recorded declines (much of it being blamed on the weather) but then the last three recorded gains, some quite substantial (Wingstop: +21.6%). Chipotles and Popeyes recorded about +5.5% each. Burger King reported stronger same-store sales (+3.8%) than McDonald’s (fell -1.9% even though net sales rose +5%) for the second, consecutive quarter. The cost of eating-out at restaurants has climbed much quicker than eating at home. Wingstop’s CEO commented “consumers tend to pull back on the high-frequency (i.e. quick-service restaurant) occasions”. Consumers visiting Wingstop tend to do so as a treat rather than as a routine. That said, he also commented their low budget consumers are returning more frequently these days – so maybe there’s some product substitution going on? Starbucks announced a drop of -4% on Q1 same-store sales – in China it dropped -11%. Overall, the number of transactions fell -6% with a decline in each of its geographic segments. Despite this, they blame it on the cold weather, more cautious consumers around the world and the conflict in the Middle East. Surely the cold weather would encourage more coffee consumption?? Seems consumers are sticking with their favourite buys at the expense of the regular ones. Whatever the reason(s), there has been no change in favourite foods which are still being ordered – some with greater frequency.

The RATE of Inflation has been coming down – not actual prices. For that you need deflation - and that’s not a good situation we want to be in! There is definitely some form of product switching going on which is likely to be a function of loyalty and rewards. Someone’s gain is someone else’s loss. What’s interesting is that it’s a global phenomenon (Australia, Canada, Germany, Japan and UK).

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