Market Movers & Shakers

It has been a little over a month since the last edition of Notes from the Trading Desk was published and since then, US equity markets experienced their largest pullback since October of last year. The S&P 500 declined over 5% during the first three weeks of April, trading beneath its 50-day moving average for the first time in nearly 7 months and breaking below 5,000. Stronger than expected economic data and hawkish Fedspeak contributed to a backup in yields which placed pressure on stocks. A selloff in semiconductor/AI related stocks followed the lack of a positive earnings preannouncement from Super Micro Computer (SMCI) which also dragged down the broader technology sector. Shares of chip-giant Nvidia (NVDA) posted their worst single day percentage decline since the COVID-19 induced selloff in March 2020. In addition, geopolitical tensions in the Middle East escalated throughout April as Israel launched a retaliatory strike on Iran following Iran’s missile and drone barrage on the country, sparking concerns of a larger regional conflict and spiking volatility, as measured by the VIX, to six-month highs. The garden-variety pullback in stocks was staved off as earnings season kicked into high gear in mid-to-late April. Earnings reports from some of the largest index constituents such as Microsoft, Google, and Tesla were well received by market participants and provided a tailwind to the broader indices. The S&P 500 and Nasdaq both found near-term support at their 100-day moving averages, breaking their losing streak of three consecutive weekly declines and since logging their second straight week of gains. Treasuries have caught a bid across the yield curve of late as the 2-year U.S. Treasury yield retreated back to ~4.80% after briefly topping 5.0% while the 10-year U.S. Treasury logged a sub 4.50% close for the first time since early April. WTI Crude Oil settled in below $80/barrel while gold prices pulled back from recent record highs to ~$2,300/oz.

April’s nonfarm payrolls report was released on Friday, May 3rd and came in softer-than-expected, sparking a single-day rally of more than 1% for the S&P 500 and causing the VIX to retrench below 14 for the first time since late March. The positive reaction to the weaker-than-anticipated report reaffirms the “bad news is good news” stance markets are taking as participants recalibrate the probabilities and timing of the first interest rate cut from the Federal Reserve. U.S. employers scaled back hiring in April, with total nonfarm payrolls increasing by 175,000, lower than the average gain of 242,000 over the prior 12 months and coming in below consensus estimates of a 235,000 increase. April’s payrolls increase was the slowest monthly gain since October. Job gains occurred in health care, transportation and warehousing, and retail sectors of the economy while the pace of government hiring slowed compared to recent months. The unemployment rate ticked higher to 3.9% against expectations it would remain unchanged at 3.8%, while the labor force participation rate (the percentage of the population that is either working or actively looking for work) held steady at 62.7%. The unemployment rate has remained in a narrow range of 3.7% to 3.9% since August 2023, however according to CNBC “a more encompassing rate that includes discouraged workers and those holding part-time jobs for economic reasons edged up to 7.4%, its highest level since November 2021.” Average hourly earnings increased by 0.2% month-over-month and 3.9% year-over-year, the slowest annual pace of growth since June 2021 and coming in below economists’ forecasts. Average hourly earnings growth continues to descend from the cycle high of 5.9% logged in March 2022 providing an encouraging sign for inflation. April’s payrolls report suggests the U.S. labor market may be cooling after a strong start to the year.

The Federal Reserve held its most recent Federal Open Market Committee (FOMC) meeting from April 30th-May 1st where it maintained the target federal funds rate at its current range of 5.25% to 5.50%. The decision marks the sixth consecutive meeting that the Federal Reserve has held interest rates unchanged at a 23-year high. Fed Chair Jerome Powell acknowledged the first quarter’s hot consumer and producer inflation data and stated that it will likely take longer than previously anticipated for the Federal Reserve to gain confidence that inflation is on a sustainable path toward their 2% target. The FOMC’s May statement noted the lack of further progress on the inflation front which led the committee to raise their longer-term inflation and growth expectations. The most noteworthy item from the May FOMC meeting was the Federal Reserve’s widely anticipated announcement that it would slow the rate of its balance sheet reduction program starting in June. The current balance sheet reduction program runs at a pace of $95 billion a month by allowing $60 billion in Treasuries and $35 billion in mortgage-backed securities (MBS) to roll off upon maturity. The Federal Reserve plans to lower the pace of Treasuries running off its balance sheet to $25 billion a month, a slower pace than the $30 billion a month clip the market had forecasted coming into the meeting. A deceleration in the pace of runoff effectively eases financial conditions as the amount of liquidity being withdrawn from the system is reduced. U.S. equities were largely unchanged following the announcement while longer dated U.S. Treasuries ticked marginally higher.

Earnings season moves into its tail end next week with more than 80% of S&P 500 companies having already reported results. For Q1 2024, 77% of S&P 500 companies have reported a positive EPS surprise while 61% reported a positive revenue surprise. According to FactSet, the blended year-over-year Q1 earnings growth rate for the S&P 500 is 5.0% for constituents that have already reported. If that growth rate sticks for the quarter it would mark the highest year-over-year earnings growth rate for the S&P 500 since the second quarter of 2022. Share buyback announcements have ramped up as of late, with total announcements so far for Q1 2024 earnings season up to $262 billion following a record-breaking $110 billion buyback program announced by Apple and a $70 billion buyback program from Google’s parent company, Alphabet. Some of the largest and most notable single-day gainers following earnings this quarter were: Alphabet +10%, Eli Lilly +6%, and Apple +6%; while some of the largest single-day declines post-earnings came from: CVS -16.8%, Starbucks -15.9%, Super Micro Computer -14%, Meta -10.5%, and Advanced Micro Devices -8.9%. The market event of the month arguably falls on May 22nd when Nvidia reports earnings after the bell – recall that last quarter Goldman Sachs’ trading desk called Nvidia “the most important stock on planet earth” given its outsize influence on gains in the major indices this year.

Given that more than two-thirds of the U.S. economy is driven by consumer spending, corporate commentary surrounding the health of the consumer is certainly worth keeping an eye on. The initial wave of earnings from consumer facing companies, specifically quick-service restaurants and food manufacturers, have revealed some potential weakness in terms of consumer resilience. Sysco, a wholesale restaurant food distributor, highlighted a decrease in restaurant traffic during the quarter. McDonalds noted that people across the income spectrum are increasingly looking for value. Snack giant Mondelez observed that shoppers are becoming more sensitive to the overall price of products while Kraft Heinz pointed out a noticeable decrease in spending from lower-income households. However, despite downbeat commentary from this cohort of businesses, credit-card processing giants Mastercard and Visa reported that overall consumer spending remains healthy. Online travel company Booking Holdings highlighted increased travel demand with strength in international travel while cruise operator Royal Caribbean cited robust bookings and strong onboard spending.

Updates & News*

Idiosyncratic opportunities following earnings and the increase in volatility during the month of April provided Tandem with the opportunity to accelerate our transition process in new accounts and accounts that have recently deposited new funds. During the week ended April 19th alone, Tandem found opportunity to put cash to work on the transition level in more than 25+ individual holdings across its three strategies. As far as transition speed goes, new money is currently being invested at a more rapid pace than normal. Accounts that have been with Tandem for ~2 weeks are nearly 50% of the way transitioned into our strategies while those that have been here for a month are ~75% in-line with our strategies. Transition speeds have plateaued after the 1-2-month mark as our quantitative investment process suggests a handful of core holdings remain unsustainably overvalued at current prices. As a result, we have continued to be patient with the last 25% of the transition.

*The transition level activity taken by Tandem is applicable to new accounts and new money, not the composite or firm-wide level. New accounts and new money are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

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