Economic Data Watch and Market Outlook
The MSCI World climbed 0.93% for the week with US growth stocks, small-cap US equities and Japanese equities contributing to a majority of the weekly return. The S&P 500 rose 0.99%, while the MSCI EAFE climbed 0.72% and the Bloomberg US Aggregate Bond Index climbed 0.47%.
US stocks ended the week higher on the back of favorable inflation news. The key economic data point released this week was the Commerce Department’s core personal consumption expenditures (PCE) price index which climbed 2.8% year-over-year in January. This was in line with expectations and marked the slowest increase since March 2021. Eurozone inflation also dipped with the annual inflation rate falling to 2.6% in February from 2.8% the previous month – core inflation fell to 3.1% from 3.3% the month prior. This Friday we will receive monthly labor statistics which will provide further insight into where jobs are trending. In recent months job numbers have exceeded expectations with January seeing 353,000 new jobs generated, almost double economists’ expectations. Meanwhile, crude oil surged this week topping $80 a barrel, the highest level in four months due to concerns that oil-producing countries could continue to maintain production cuts for the foreseeable future.
Over the last year, the gap in economic growth between the US and the rest of the world has widened. While countries such as the UK and Japan have seen their economies shrink, both officially entering a recession in Q4, the US has been much more resilient. UK consumer spending fell over the second half of 2023 while wage growth outpaced inflation for the first time in over 2 years, and Japanese consumers are seeing prices increase faster than wages. Economic trouble is not just isolated to the countries previously mentioned. Much of Europe as well as China are facing similar issues while US consumer spending has remained relatively strong despite rising interest rates.
Equities
Major benchmarks mostly ended the week higher as the Nasdaq and S&P 500 entered into new record highs not seen in over two years. The week also ended a strong month for equities as the S&P 500 marked its strongest first two months of the year since 2019. The gains during the week were mostly broad-based as the equal weighted index slightly outperformed. The focus points this week for equities was the Personal Consumption Expenditures Price Index. The Fed uses the Core Personal Consumption Expenditures Price Index as a gauge for inflation. Equities rose following the release, but many Fed policy makers still echoed the recent narrative that they were in no place to start cutting rates. Futures markets closed the week with only a slightly higher chance of a rate cut in the next two meetings as it is now 24.0% versus 23.4% the week prior.
For the week, the S&P 500 gained 0.99%, the Dow Jones Industrial Average fell (-0.11%), and the Nasdaq composite rose 1.74%. Small caps outperformed large caps this week as the Russell 2000 Index rose 3.00% while the Russell 1000 Index rose 1.03%. Small caps gained some ground this week despite the outperformance of the S&P 500 versus the Russell 2000 Index is at its widest point in decades. From a style standpoint, growth outperformed value across market caps. The top performing sectors for the week were led by technology and followed by consumer discretionary, energy and materials. The worst performing sectors were led by healthcare and followed by consumer staples, and utilities. Developed markets globally outperformed emerging as the MSCI EAFE Index, which tracks 21 developed countries excluding the US and Canada, rose 0.72% while the MSCI Emerging Markets Index declined (-0.30%). Overall, equities were positive and the MSCI World posted a 0.93% return for the week.
In Europe, the Euro STOXX 600 Index ended relatively unchanged and remained near historical highs. Inflation data in the region made investors reassess the timing of interest rate cuts by the European Central Bank. Germany’s Dax rose 1.81%, Italy’s FTSE MIB gained 0.71%, Frances CAC 40 Index declined
(-0.41%), and the UK’s FTSE 100 Index lost (-0.31%). Japanese equities were higher as the Nikkei 225 gained ~2.13% and boosted monthly gains for February to near 10%. The broader-based TOPIX index rose 1.83% during the week. Chinese equities rose as investors cling to hopes that Beijing may take economic measures to stimulate growth as the property sector continues to struggle. Country Garden is an example this week as they received a winding-up petition in Hong Kong over a USD equivalent $204 million dollar loan. The Shanghai Composite Index gained 0.74% while the blue-chip CSI rose 1.38%. In Hong Kong, the Hang Seng Index lost (-0.82%).
Fixed Income
Treasury yields fell across the board this week in response to positive inflation data. The 2-year Treasury yield fell 13 bps, the 10-year treasury yield fell 7 bps, and the 30-year Treasury yield fell 4 bps. Meanwhile, major bond indices jumped slightly with the Bloomberg US Aggregate Bond Index climbing 0.47%, the Bloomberg US Corporate High Yield Index climbing 0.20%, and the Bloomberg US MBS Index rising 0.59%.
According to Bank of America’s CEO Brian Moynihan, 7% mortgage rates are here to stay, and home buyers are going to adapt. Despite the rise in mortgage rates, home prices have continued to rise in over 85% of US cities, according to a recent Redfin report. Compared to historical averages, mortgage rates in the 7% range are relatively acceptable. Average 30-year FRM mortgage rates have risen 0.29% YoY to 6.94% as of 2/29/24 with a 52-week average of 6.88%. The average 30-year FRM mortgage rate since 1971 is 7.73%.
Hedge Funds
Performance for the week and month was pretty good with the average global fund gaining +10 bps for the week (vs. MSCI World +5 bps), while the average US long/short (L/S) fund similarly gained +19 bps WTD (vs. S&P 500 +18 bps). On the month, this puts the average global fund up +1.9% (vs. MSCI +4.3%) and the average US L/S fund up +3.1%, capturing about 60% of the upside of the S&P. Meanwhile, the average EU-based HF is up +1.5% MTD (vs. Euro STOXX 600 +2%) and the average Asia-based hedge fund (HF) up +3.2% (vs. MSCI Asia +4%).
HFs were small net buyers of global equities this week as they added to both sides of the book in nearly equal amounts, with a slight skew towards long additions. From a regional perspective, the buying was driven by Europe and Japan, while North American (NA) equities were net sold. Looking closer into NA flows, the bulk of the selling took place at the single-name level while HFs covered shorts at the index level (ETFs made up ~93% of what was bought since the start of this week). Meanwhile, TMT-related stocks led the selling in notional terms. The activity was more pronounced within the ‘Magnificent 7’, though the broader TMT universe (excluding Magnificent 7) were also net sold, indicating a slowdown in the ‘broadening out of TMT’ narrative. Breaking outflows at the industry level, IT services, semiconductors and software led the selling within the broader TMT universe, while HFs were buyers of entertainment, tech hardware and wireless telecom. HFs were also net buyers if real estate for the 6th straight week. HFs were net sellers of almost all single-name sectors in NA, excluding materials where HFs were smaller buyers of metals & mining and containers & packaging. Outside the US, HFs were net buyers of European equities as they added longs and covered shorts in similar amounts. This marks the 6th out of 9 weeks this year where HFs have been buyers of the region. At the sector level, the long additions were relatively broad-based, led by TMT-related industries, industrials, energy and healthcare. HFs also trimmed gross exposure from consumer-related sectors (largely consumer discretionary), while also covered shorts in smaller amounts across other industries. As for the broader Asia region, Asia ex-Japan flows were more mixed, though tilted net bought as long additions outpaced short adds. The buying was led by China though positioning to the region continues to sit at the most underweight levels seen in multiple years. Australia and India were net sold. HFs also continued buying Japan, though the flows were led by short covering as opposed to HFs continuing to leg into the region.
Private Equity
Private credit emerges as a beacon of hope for major private equity firms amidst challenging market conditions, according to PitchBook’s US Public PE and GP Deal Roundup. The private credit portfolios of leading PE managers, including KKR, Blackstone, Apollo Global Management, and others, delivered a median gross return of 16.4% in 2023, outperforming their PE strategies which achieved a median gross return of 9.8% for the same period. This stark contrast underscores the significance of private credit amidst a subdued exit environment and high borrowing costs. Carlyle and KKR experienced significant declines in PE realizations, while only Blackstone and Ares saw increases. Despite regulatory uncertainties, firms like KKR anticipate a pickup in exits towards 2025. Apollo emerges as a frontrunner in private credit, reporting impressive debt originations totaling $97 billion in 2023, outpacing its peers.
Apollo’s private credit portfolios yielded a robust gross return of 19.8% in 2023, reflecting the asset class’s resilience and attractiveness to investors seeking current income and inflation protection. Apollo is strategically raising capital for various credit strategies, aiming to capitalize on institutional demand. The firm also plans to expand its private credit offerings to affluent individuals, incorporating asset-backed finance. The growing traction of private credit is evident in the substantial capital raised by the seven public managers in Q4, with credit alone accounting for 59%. This shift in investor focus highlights the appeal of asset classes offering income, inflation protection, and access to areas of secular growth. Private credit’s outperformance amid challenging market conditions underscores its pivotal role in the investment landscape, offering a silver lining for PE firms navigating uncertainties
Authors:
Jon Chesshire, Managing Director, Head of Research
Elisa Mailman, Managing Director, Head of Alternatives
Katie Fox, Managing Director
Michael McNamara, Analyst
Sam Morris, Analyst
Sources: Marketwatch, WSJ, Bloomberg, Reuters, Pitchbook, Yahoo Finance