The Weekly Wrap: BayFort Capital Global Equity Research

The Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite soared to record highs this week, with the Dow surpassing the 40,000 mark for the first time ever. Stocks extended their upward trajectory this week, witnessing a widespread rally across the board. Large caps, led by the S&P 500, surged by 1.54% for the week, while small caps represented by the Russell 2000, rose by 1.74%. The rally was comprehensive, evidenced by a 1.1% gain in an equal-weighted version of the S&P 500. In Europe, the STOXX 600 closed the week with a 0.42% increase. Meanwhile, the yield curve moved lower by 5-8 bps across maturities.?

The week started on a muted note with low trading volumes as the market awaited the April CPI report on Wednesday. The market tone shifted dramatically on Wednesday after the CPI report came in at or slightly below expectations, a notable contrast to the hotter-than-expected results of the previous three months. Headline prices increased by 0.3% in April, slightly below expectations, while core prices (excluding food and energy) rose by 0.3%, meeting expectations. Excluding housing costs, inflation has remained near the Federal Reserve's target rate of 2% for the past twelve months.?

Housing inflation, measured through rent surveys, can lag behind the broader trend due to the use of annual lease agreements. However, there is good news in this area as well. The month-over-month change in CPI rent for April reached a 3-year low of 0.35%. Year-over-year, CPI rent rose by 5.44%, marking a two-year low. This is a significant improvement from the peak of 8.11% observed in March 2023, which coincided with a one-year lag following the peak in private sector asking rents.?

Overall, the April 2024 CPI report suggests that inflationary pressures are easing in the US, with the exception of housing costs. The slowdown in rent inflation is a welcome development, but it may take some time before it fully translates into lower housing costs for consumers.?

BayFort Capital View: Market dips resulting from geopolitical concerns can present attractive entry opportunities for investors on the sidelines. While geopolitics may pose short-term challenges, it's unlikely to significantly impact the US economy in the medium to long term. Therefore, markets are expected to eventually overcome these issues. The US Fed is willing to support the economy if required thereby providing support on the downside (if any) to the markets providing a safety net for the markets (known as the "Fed Put"). Futures markets point to a coordinated easing cycle across the OECD, with 29 out of 30 countries. This year is the year of Global Central Bank rate cuts, so we should see valuations improve as interest rates decline in line with rate cuts. This could pave the way for a new stock market upcycle driven by a double whammy: lower interest rates boosting valuations and robust earnings growth fuelled by a paradigm shift in computing and productivity powered by artificial intelligence (AI) in CY24-25. Our analysis indicates that the current market conditions provide an excellent opportunity to invest in global stocks, offering the potential for significant returns over the next 18-24 months.

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