Investment Comment
3rd May 2024
May's lesson
Wednesday’s decision from the Federal Reserve (‘Fed’) not change interest rates was as expected. Inflation remains too high for comfort, and whilst there are pockets of weakness in the US economy, economic growth seems resilient. Hence no interest rate change. But maybe the Federal Reserve had read last week’s investment comment from Artorius. In it we tried to unpick the different forces in the Federal Reserve Balance sheet, so when the Central Bank announced that it would be reducing the amount of Quantitative Tightening from $60bn a month to $25bn, it signaled that it would effectively be reducing the liquidity it is taking out of the market. This may mean that the upward march of bond yields will ease, as the Central Bank will be selling less into the market.
Quantitative Tightening ('QT') has reduced the size of the Fed balance sheet. As of early 2024, this QT has shrunk the Federal Reserve balance sheet from ~$9 trillion to $7.7 trillion. By cutting monthly QT, maybe policymakers are signaling they are willing to maintain a bigger balance sheet for the foreseeable future. The new normal won’t be a return to the old normal.
Quantitative Easing and Tightening can be seen in the size of the Balance Sheet
Source: Artorius, Bloomberg
Earnings: size and places differ
US quarterly earnings updates have been better than expected, but the upbeat news has been met with disappointing share price response. On average, the earnings surprise has come in around 8.5%, according to Factset, but the average post-announcement price move has been a 0.5% fall in share price.
What is striking is the difference in earnings updates and guidance from large US companies and that from European companies and smaller companies in the US. Large US companies (and its not just technology giants) have been better than expected and have provided relatively good guidance for the rest of 2024. The smaller companies in the US have seen disappointing updates and poor guidance resulting in further reductions in the expectations for profits outlook. Which is odd given US companies having a higher exposure to the US economy than the larger US companies, and the US economy is reportedly resilient.
In Europe beset by a fragile economy, albeit one that appears to be not getting any worse (and even showing signs of some recovery), companies have generally been underwhelming in their updates. Guidance has been modest rather than upbeat seen in the US.
With a lack of catalyst in the form of economy or earnings to drive the market from a top-down perspective, investors may reluctantly draw their eyes towards the forthcoming elections in the UK and US. Differing policy promises between electoral parties sometimes do not translate into government, but we will maintain a wary eye on matters of policy with potential implications not just for economies and markets, but also for personal taxation.
Gerard Lane, Chief Investment Officer
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All expressions of opinion reflect the judgment of Artorius at 3rd May 2024 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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