Economic Data Watch and Market Outlook
Stocks and bonds generally advanced for the week with the exception of US small caps and some areas of the bond market. The MSCI World jumped 1.51% while the S&P 500 advanced 1.68%. The Bloomberg Global Aggregate Bond benchmark rose a modest 25 basis points.
Nvidia dominated the headlines mid-week as its earnings, revenue, and outlook surged. As a result, the NASDAQ hit a new all-time high on Thursday, jumping 3%, its first 3% day since March 22, 2000. The Nikkei 225 Index also hit an all- time high reaching 39,068.68, surpassing the previous high set on December 23, 1989.
When considering these market highs, market breadth is also significant. While the equal weighted S&P 500 is still behind the more commonly used cap weighted S&P 500 benchmark, on a year-to-date basis, the disparity is no where near what was seen in 2023 as both are up year-to-date, 2.45% (equally weighted) versus 6.87% (asset weighted) as of Thursday. The Magnificent 7 have contributed to that disparity with five of the seven up YTD. The below chart indicates the number of stocks above their 200-day moving average.
Warren Buffet released his annual letter on Saturday noting strong performance and a significant cash hoard, $167.6 billion at the end of 2023. How that cash is applied with stronger market breadth will be closely watched.
Personal Consumption Expenditure (PCE) data will be released on Thursday along with jobless claims. PCE, an indicator of inflation on domestic goods is one of, if not the key indicators the Fed uses to formulate a view on rates (jobless claims are another key indicator). With the economy seemingly continuing to maintain its strength, seven rate cuts that were expected at the beginning of 2024 seems very unlikely. The amount and timing of rate cuts will likely depend on either of these two data points.
Equities
Major equity indices across the globe were positive this past week led once again by Asia with the Hang Seng HIS +235 bps and the Nikkei 225 +247 bps. What differed took place in the US where large-cap indices were positive for the week (S&P 500 +168 bps) whereas small-caps were negative (Russell 2000 -77 bps). Unlike many weeks in the past few years, there was very little divergence between value and growth in both large and small cap indices, although growth did outperform value, only slightly, even with Nvidia’s huge earnings release.
Russell 1000 Growth +165 bps vs. Russell 1000 Value +141 bps
Russell 2000 Growth -55 bps vs. Russell 2000 Value -99 bps.
Nvidia announced Wednesday after the close that AI is here to stay reporting revenue had jumped 265% from a year ago to $22.1B for the first quarter beating consensus estimates of a 240% rise to $20.6B and adjusted earnings growth up 765%, from a year ago, to $5.15/share beating consensus estimates of $4.64/share. Markets had been trending lower earlier in the week until Nvidia’s announcement leading to big Nasdaq and S&P 500 rallies on Thursday. Not surprising NVDA options call volumes made a 2-year high this past week but still below the all-time high in June 2021. Other semiconductor companies such as Micron’s stock prices jumped Thursday following Nvidia’s news. Big names to watch this week for earnings are Macy’s and Birkenstock (health of the consumer) and Salesforce (software as a service or SaaS name).
Even with Nvidia’s news and proceeding rally in tech stocks, consumer staples was the big sector winner for the week, advancing 205 bps on the back of Walmart reporting higher than expected earnings and guiding revenue higher than consensus estimates. Tech also lagged materials (+196 bps), industrials (+183 bps), financials (+160 bps), and healthcare (+151 bps). All sectors were positive for the week.
Goldman Sachs’ ETF trading volumes finished the week at 27.5% of the tape down from a YTD high of 34%.
Fixed Income
Treasuries were mixed throughout the week with yields on the shorter end of the curve climbing slightly while longer-term yields fell. The 2-year Treasury yield climbed 3 bps, while the 10-year Treasury yield fell 4 bps, and the 30-year Treasury yield fell 8 bps. Major bond indices were mixed as well with the Bloomberg US Aggregate Bond Index rising +0.25% and the Bloomberg US Corporate High Yield Index rising +0.42%, while the Bloomberg US MBS Index fell -0.91%.
Demand for corporate bonds has seen a major uptick in recent weeks with $50B of bonds being sold to finance M&A deals. According to Arvind Narayanan at Vanguard Group there is still a large pipeline of deals that will need financing with approximately $276B pending M&A deals waiting to be financed this year. Buyouts are increasing internationally as well with the average spread for high-grade bonds trading at their lowest level since November 2021. In Europe, there has been $72B worth of M&A activity so far this year which is a 77% jump compared the same period a year ago.
Bank of America projects that a record $500B will flow into high-grade corporate debt in 2024 based on current flows while Barclay expects $400B to $600B could move out of money market funds and into risk assets throughout the next year. Investors have been benefiting from duration due to bets on central bank cuts in 2024. Since the end of October long-dated corporate bonds have seen almost 4x that of shorter-dated debt.
Hedge Funds (as of Thursday, February 22nd)
This past week was fairly challenging for performance as hedge funds (HFs) globally were unable to capture a meaningful portion of Thursday’s rally in equities. For the week, the average global fund was up +36 bps, representing a fraction of the MSCI World’s gain (+1.7%). The challenged relative returns were most apparent across the group of North America (NA)-based funds as the average US-based HF (across all strategies) and average US L/S fund each posted gains of only ~30 bps, which compares to the S&P 500 +2.1% WTD through Thursday. HF performance relative to benchmark indices was slightly more favorable across other regions. The average EU-based HF post gains of ~40 bps through Thursday (vs. Euro STOXX 600 +90 bps), while Asia-based funds were up ~70 bps on average (vs. MSCI Asia Pacific +1%).
Despite the day-to-day volatility in equity benchmark indices, flows were relatively quiet for the week. Starting with NA, HFs trended towards selling equities Monday through Wednesday (via an even mix of long sells/short adds), but then subsequently bought back all of what they previously sold following Thursday’s tech rally (via long buys) following Nvidia’s earnings release. Over the full-week, there was little directional flow at the sector level, but tech was the most net sold sector as HFs trimmed software longs and added shorts to semiconductors and hardware. On the other hand, HFs were small net buyers of industrials, materials, and financials with the buying of all three sectors coming on the long side. Consumer staples also was net bought (the most in 10 weeks) following Walmart’s stronger than expected results. At the factor level, HFs trended towards selling the momentum factor over the past few weeks through Wednesday, but then pivoted towards buying the factor in a relatively outsized amount following Thursday’s rally. Across other regions, European equities were net bought on the week as a result of HFs covering shorts in addition to buying longs in the region. At the sector-level, there was concentration in the flow, with most of what was covered taking place in ETFs and financials, while materials and industrials drove the bulk of the long buys. As for the broader Asia region, HFs were net sellers of both Asia ex-Japan and Japan equities, with the selling of both regions a product of HFs trimming longs within each. Within AxJ, the long selling was more concentrated in equities domiciled in India. The Japan net sell skew this week was more limited in size but puts an end to 7 consecutive weeks of buying seen this year.
Private Equity
In 2023, private equity-led take-private deals saw a resurgence despite not reaching the peak levels of 2021 and 2022. With $170 billion invested across 133 take-privates, the year was marked by a mix of smaller deals and a few large buyouts, diverging from historical trends where mega-deals dominated. Increased interest rates made financing expensive for larger deals, leading to more focus on smaller transactions. Nonetheless, some mega-deals, like Japan Industrial Partners’ acquisition of Toshiba and the pending purchase of Adevinta, demonstrated that high-quality assets could still drive significant transactions. Private credit financing is poised to play a more prominent role, supporting larger deals, as lenders become more comfortable with sizable and complex transactions.
Valuations, especially in Europe, remain relatively suppressed, offering attractive opportunities, particularly in the smaller end of the market. London-based FinTech, Equals Group, is likely to be delisted through acquisition by Chicago-based PE firm Madison Dearborn Partners, showcasing ongoing interest in European targets. Regulatory hurdles, however, pose challenges, with growing concerns over regulatory risks, particularly from agencies like the FTC in the US and regulatory scrutiny in Europe on technology deals and investments involving foreign state investors.
Despite the S&P 500’s record highs driven by large tech companies, valuations at the company level paint a different picture, with potential opportunities for take-privates. Last year, UK companies accounted for a significant portion of European take-private deals, indicating continued interest in the region. Despite the financial allure of take-private deals, regulatory considerations and potential regulatory changes remain significant factors influencing the volume and nature of such transactions in 2024.
Authors:
Jon Chesshire, Managing Director, Head of Research
Elisa Mailman, Managing Director, Head of Alternatives
Katie Fox, Managing Director
Sam Morris, Analyst
Data Source: Apollo, Barron’s, Bloomberg, BBC, Charles Schwab, CNBC, the Daily Shot HFR (returns have a two-day lag), Goldman Sachs, Jim Bianco Research, J.P. Morgan, Market Watch, Morningstar, Morgan Stanley. Pitchbook, Standard & Poor’s and the Wall Street Journal.