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The Weekend Edition # 128 - Can this Market Rally Continue?

Market Recap: What a Quarter!; Macro: Can this Market Rally Continue?; Closing Thoughts: Correlations are high

Welcome to another issue of the Weekend Edition!

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Market Recap - What a Quarter!

March 25 - March 29, 2024

It was a relatively quiet week with lower volume as people took advantage of the holiday on Friday. Month-end and quarter-end rebalancing weighed on the early part of the week, exactly as we had discussed on Monday and the markets closed out the week slightly below all-time highs.

But, it certainly was not a quiet quarter. The markets kept marching higher and higher, despite stark warnings from several major voices.

Equities and Bitcoin

We received better-than-expected earnings for Q4, 2023, and that probably helped put the S&P 500 in the lead over the tech-heavy Nasdaq or the Russell 2000 small caps.

Bitcoin made a stellar turnaround gaining +65% on the week, and the AI trade still continues to see momentum.

Inflation has been re-accelerating again and we’re seeing that play out in sector leadership. Energy was the best-performing sector for the quarter.


With the reflation trade comes higher bond yields. US Treasury Yields actually gained quite a lot of ground, averaging an ~8% increase over the quarter. Bond prices obviously languished but, this didn’t seem to deter equity markets at all.

On the corporate issuance side however, High Yield performed better than Investment Grade for the quarter. HYG posted +1.51% for the quarter while, LQD posted -0.86%. Much of this likely also has to do with issuances, as we saw the highest level of issuances in Investment Grade debt since 2019.

Global Markets

Developed markets seemed to perform better overall compared to Emerging Markets.

Clearly, the Central Banks’ dovishness in Developed Markets has helped ease financial conditions. The first to cut has now been the Swiss National Bank. There are some discussions as to whether this is a harbinger or not because inflation remains well under control there but, we’re hard-pressed to believe that other developed markets will not follow through. Everyone other than Japan is getting ready to cut!


After what we’ve just covered, it should come as no surprise that we’re seeing commodity prices increase, with the exception of a few. Iron ore continues to see pressure because of Chinese demand.

Cocoa has been the biggest winner, as everyone already knows, followed by Crude Oil. Gasoline prices are starting to increase as well, but still not spiking yet.

But suffice to say, the reflation trade is back on and we’re going to see more of it. Global Manufacturing seems to have bottomed, and we’re going to see the effect of that soon enough.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro - Can this Market Rally Continue?

The big question on everyone’s mind right now is: Can this Market Rally Continue?

There’s no easy answer to this but, the current conditions favor equities. We have a situation where:

  • The US economy remains relatively strong with wealth effects gaining ground and causing a reflationary scenario.

  • The Fed is still focused on cutting rates to reduce the cost of borrowing, particularly for the government and big businesses. The US Government’s interest cost on debt is set to reach $840b in 2024!

  • The Fed’s balance sheet reduction will be tapered introducing liquidity into the economy.

All of this helps US Government spending in an election year.

We’re already seeing multiple-expansion in the S&P500 equal-weighted index. Goldman Sachs reports it at 17x above the long-term average of 15x. So now the next stage is for earnings to their job.

The current earnings yield on the S&P500 is 3.45% which is below bond yields, and this just means there’s more catching up to do. If we look at forward estimates, we’re likely to cross the 10Y yield on a forward basis, so we definitely need earnings to improve in line with the 8% -10% estimate.

We’ve been seeing some rerating lower in earnings because the bottom-half consumers of the K-shaped economy still remain cash-strapped, and inflation will weigh on them even further.

Going forward we see equities rallying but we remain cautious on three fronts:

  • A strong economy and inflation could bring about a steepening in the yield curve, pushing up the long-term yields. This could weigh on interest-rate sensitive cyclical stocks and small cap growth counteracting the Fed’s rate cuts. In fact, with the Fed cutting rate, the US treasury will likely move out on the curve for issuances, further pushing up long-end rates.

    We like Small Cap Value here which is the IWD instead of outright small caps or small cap growth. Interest rates are still high enough to remain prohibitive for small businesses, and we see a pick up in the long end as weighing on them.

  • MegaCap Tech which has now been reduced to the “Terrific Two’s” continue to pull back as earnings begin to normalize.

  • The AI trade is alive but will take time to broaden out. Not only is the infrastructure more expensive and challenging but also the acceptance and adoption of AI is not a priority for companies until they actually see productivity gains and margin growth. So, there’s a wait-and-see approach.

Articles This Week - In case you missed it

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Closing Thoughts - Correlations are high

While market performance this quarter was led by developed markets, it’s not as if emerging markets didn’t do well. In fact, the market snapshot above shows us that most markets have performed quite well.

GS did a study that found that quite a few international markets these days move in tandem with the US. One factor obviously is the USD being the global currency and the other is the almost coordinated hiking cycle.

But as the saying goes, “when America sneezes, the whole world catches a cold” and this seems to be the case with equities as well.

Given this situation, it’s tough to find uncorrelated returns and diversify your portfolio but not altogether impossible. This is something that we continue to focus on in MacroVisor - not just on a global level but, also within markets.

Have a great week ahead!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.


US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.

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