April 2023 – Inflation and recession temporarily contained

April 2023 – Inflation and recession temporarily contained

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SFRR closes the month at -0.36% (+8.49% YTD)

SFPG closes the month at -1.08% (+15.91% YTD)

SFQS closed the month at -0.23% (+16.20% YTD)

April has been a month of narrow sideways ranging markets with indices showing signs of exhaustion after the good start of the year. Despite the appearance of market stability, the dispersion across stocks, sectors and risk factors has been very wide with a bias towards more conservative positions.

April inflation remains in line with expectations, although it has not subsided (US inflation +4.9 in 12 months, excluding energy and food up +5.5% in the last year). Still very high so we should not expect rate cuts in the short term. The market is pricing in rate cuts from July onwards in the US, but if that to be the case, we would need to see a significant deterioration of the economy. The leading recession indicators are in the danger zone, with the exception of employment, which remains strong. With this macro environment the market has narrowed the sideways range towards the upper zone of the band in which it has been moving since May 2022. The 4150/4200 S&P500 and 13,500/13700 Nasdaq zones will be difficult to break consistently without a substantial change either in monetary policy or in economic growth data. In the end, it will all boil down to inflation control and the extent in which interest rates, which rise to 5.25% in the US and 3.75% in Europe during May, can become normal. In the US, we should have seen the ceiling by now, and in Europe increases are expected until September as current rates are still expansionary and lag the US. What we can expect is an increasing slowdown in the sectors most dependent on financing such as real estate and automobiles, and in general discretionary consumer goods as it is easier to put off buying them.

During April, larger cap stocks have held up indices as noted when comparing S&P Top 50 (+2.52%) vs S&P 500 Equal Weight (+0.36%) and S&P 500 (+1.46%). In Nasdaq 100 (+0.49%) vs Nasdaq 100 Equal Weight (-2.22%). In the Russell index, the difference was even greater: Russell 1000-big caps (-0.29%) vs Russell 2000-small caps (-3.68%).

By factors, Low Vol (+2.66%), High Dividend (+2.12%) and Quality Factor (+1.38%). Large growth and value companies rise (+1.02% and +1.56% respectively) while medium and small growth and value companies fall (-1.16% and -2.53%, respectively).

By sectors, Metals & Mining and Telecom fell sharply (-7.07% and -7.38%), while Oil, Energy Communication Services, Health Care and Financials rose between 2.78% and 3.65%. There has been some recovery in the financial sector after the turbulence of March, but stress remains, and credit conditions have tightened. Hence the poorer performance of small caps in the US, whose financing depends more on US regional banks.

On the eve of the most expected recession, many assets are pricing in a negative scenario, especially small and mid-cap companies, and growth sectors in Emerging Markets. These are the two areas where positions can be built up in the downturn. On the other hand, many cyclical and defensive companies are expensive due to expectations of high inflation and high probability of recession. It is difficult for both scenarios to coexist for long in developed economies so the market will quickly move to one side or the other. From the behaviour we see in the market, the scenario that is gaining momentum is that of recession and a shift towards defensive positions, with a better relative performance of Growth vs Value, long term government bonds vs corporates, and defensive sectors vs cyclical sectors. This could also be a consequence of the fact that June is near –traditionally a weak month for stocks– and the potential turbulence that could arise from the US debt ceiling negotiations. In summary, we expect a somewhat more volatile market leading into the summer months, with some correction due to seasonality and the state of uncertainty in the economy. We will take advantage of any small corrections to accumulate positions in the most attractive assets.