The Weekly Wrap: BayFort Capital Global Equity Research

During the week, all indices faced downward pressure, with small-cap stocks bearing the brunt of the decline. The S&P 500, buoyed by large-cap growth stocks, managed to contain its weekly loss to 1.56%. Conversely, the Russell 2000, which tracks small-cap stocks, experienced a sharper decline of 2.92%. Additionally, an equal-weighted variant of the S&P 500 retreated by 2.67%. The Euro-STOXX 600 also slipped, posting a 0.26% decline for the week.

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Earlier in the week, trading remained subdued as traders awaited the release of the March CPI report on Wednesday. The Labor Department's CPI data, unveiled on Wednesday morning, revealed a 0.36% increase in headline prices for March, aligning closely with February's rise and contrasting with market expectations of a slight decrease. A significant contributor to this uptick was a notable 10.7% surge in transportation services costs over the past year, primarily driven by rising car insurance rates. Overall, inflation climbed 3.5% over the previous 12 months, marking its most substantial increase since September 2023. As a result, market sentiment turned bearish, causing the US 10-year Treasury yields to spike by 20 basis points to 4.56% before settling at 4.5% by week's end as traders sought refuge in treasuries amid escalating tensions between Israel and Iran on Friday.

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Following Wednesday’s March CPI report, futures markets adjusted their expectations, pricing in a roughly 20% likelihood of a rate cut at the Federal Reserve's June policy meeting, down from around 50% prior to the report's release. Central bank officials were vocal throughout the week, with 11 officials scheduled to speak. Their remarks seemed to reflect a shift in stance following the CPI data. Specifically, Richmond Fed Chief Thomas Barkin stated that the recent data did not bolster his confidence in disinflation, while Boston Fed President Susan Collins indicated that the updated data did not support an immediate need for rate cuts.

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Thursday's release of producer price inflation data appeared to alleviate inflation concerns, aiding equity markets in recovering some of their Wednesday losses. Producer prices edged up by 0.2% in March, slightly below expectations and well under February's 0.6% rise. Input goods prices also declined by 0.1%, continuing the recent trend of goods deflation.

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Friday's trading session was dominated by geopolitical developments, with Israel issuing warnings of a potential direct attack by Iran. Reports suggesting an imminent strike on Israel prompted investors to seek refuge in oil, treasuries and the U.S. dollar. Meanwhile, the CBOE Volatility Index (VIX), often referred to as Wall Street's fear gauge, surged to its highest level since November, causing most US indices to decline by over one percentage point on Friday.

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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