Middlefield Market Commentary
Macro Update
by?Dean Orrico, President & CEO?and?Rob Lauzon, Managing Director & CIO
Markets continued to rally in April with the S&P 500, TSX Composite and MSCI World Index returning 1.6%, 2.9% and 1.8%, respectively. For all the volatility-driven excitement over the past twelve months, the S&P 500 finished April at the same level it was at one year ago.
Recent data has been mixed, creating an uncertain investment backdrop. On the positive side, there have been three notable themes providing support for stocks. First, Q1 earnings have come in better than expected with over 70% of companies beating revenue and EPS estimates thus far. Tech companies, which represent the biggest weight in the S&P 500, have been noticeably strong with an earnings beat rate of 87%. Second, inflation data continues to trend in the right direction which has given central banks some breathing room. Although the Federal Reserve announced a 25 basis point rate hike on May 3rd, we believe the Fed, as well as other major central banks, are in the final stages of the current tightening cycle. Finally, the consumer has been remarkably resilient, supported by historically low unemployment. This has resulted in strong retail sales, especially in service-oriented industries.
While the aforementioned factors have supported markets this year, a growing body of data is signaling that an economic slowdown may be on the horizon. The Conference Board Leading Economic Index (LEI) for the US fell by 1.2% in March to its lowest level since November 2020. Negative contributions have been widespread, with 8 of the Index’s 10 components in decline over the previous six months. The Leading Credit Index is one measure we are paying particularly close attention to given recent events in the US regional banking system. On May 1st, First Republic Bank became the third regional bank in the US to fail this year while the depressed share prices of several of its peers continue to reflect the risk of a similar fate. We believe the recent struggles could lead to slower loan growth over the near-term and policy reforms over the longer-term. The Federal Reserve recently released a report on its supervision of Silicon Valley Bank in which the Fed acknowledges its failures to identify the bank’s vulnerabilities as well as the speed with which the Fed responded. The report lays the groundwork for regulatory reforms down the road; however, it was made clear that changes would not be effective for several years as they are expected to go through a standard notice and comment rulemaking process.
In addition to the economic data we are monitoring, an emerging risk is forming in the political sphere – the debt ceiling. We expect negotiations between Republicans and Democrats to be intense over the next several weeks, which could create headline risk and market volatility. If the US government were to default on its debt, the ramifications would be enormous. Ultimately, we expect a 11th?hour deal to be reached as neither Republicans nor Democrats want to be held accountable for causing a debt default. This issue is probably more noise than substance and we view any market weakness related to this topic as a buying opportunity.
About Middlefield:
Founded in 1979, Middlefield is a specialist and independent equity income manager headquartered in Toronto, Canada. Middlefield’s actively managed, award-winning funds are designed to be “investments that work for you” by distributing consistent and high levels of income through various market cycles. Middlefield’s funds span a number of market sectors including real estate, healthcare, innovation, sustainability, infrastructure and energy. Investors can access these strategies in a variety of product types including ETFs, Mutual Funds, Closed-End Funds, Split-Share Funds and Flow-through LPs. To learn more, visit?www.middlefield.com.
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