April 23, 2024
Audience: all investing levels
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After reading the news and watching online interviews on major Financial channels, I believe that investors seem to start panicking on the back of the longest losing streak of the S&P500 in 2024, down 4% in the past month.
Some investors look for answers in conspiracy theories and are not sure why some stocks can fall despite companies publishing healthy earnings - take a look:
It is weird to see the stock of a healthy company such as Netflix publishing great results and falling big time in parallel, isn't it? How can it happen? Should we panic as well? What is going on?
Well, there is no need to panic. This is just a clear example of when macro beats micro.
You might have noticed that not just Netflix, but all US big tech stocks have come down in the last few days alongside the S&P500. It has nothing to do with specific tech earnings or results. It has to do with the surprising higher-than-expected US inflation print of the other day - 3.5% from 3.2%.
In a context of slowly fading inflation as we approach the first interest rate cut (not only in US but also in Europe), such negative inflation surprise has been really disappointing.
Higher inflation means that no rate cuts are granted anymore.
Do you know what is the equity factor that is most sensitive to the (expected) path of interest rates? It is growth stocks as factor (= mainly tech). So it should not come as a surprise that Netflix, and all other big tech companies in the US, have been falling even faster than the S&P500, given the disappointing inflation news to be translated into US interest rates to be cut later (and less) than expected.
On top of it, perhaps excessive valuations just recently reached for those tech stocks means that not even great earnings can justify such high prices when things turn (slightly) sour - as it might happen with higher inflation.
If we learnt something from the past two years is that is stock markets like higher inflation (driving up nominal growth), when it is expected. The asset class that really suffers higher inflation is fixed income, or bonds - especially long duration bonds.
I would see the recent repricing of the S&P500, and other stocks markets worldwide, as a healthy correction taking away some froth. We are unlikely to see a bear market in stocks (unless new disappointing data will emerge over time, of course) - as confirmed by a (rising but) well-behaved VIX indicator of market stress.
If stocks markets look fine within a healthy correction (especially if it continues to be pushed by solid earnings) and long-dated bonds continue to be at risk, short-dated fixed income remains a good haven.
In fact, today's markets offer great income opportunities in the 0 -1 year maturities of bond curves. We can see in the chart below that US T.bills maturing over 3 months pay close to 5.5%, much more than anything with later maturity.
