Another month, another record high. It seems there is no stopping the developed market indices. In three months, equities have generated the performance of what could typically be called a good year. What is surprising is that this is on the back of less rate cut expectations on the part of the Fed (showing that the economy is still robust). At the end of last year, the expectations were for seven rate cuts by the Fed, the market is now pricing 3 rate cuts for 2024. Another notable development comes from the price of Cocoa (up 140% year-to-date), and for those who are not keeping track, this is not due to a surge in demand for Easter chocolate bunnies. This is due to simultaneous events hurting supply, such as crop damage as a result of El Nino, followed by extreme heat, aging trees and illegal mining.

The US markets continue to lead in terms of performance for the fifth straight month. There is not much substance to explain this continued up trend. This may be better explained by behavioral finance. Indeed, surveys point to the good old “FOMO” (Fear Of Missing Out) effect that was often used in 2020-2021. Investors are currently more worried about missing the upside than the potential downside.
The revised number of rate cuts is best explained by Fed Governor Waller: “There is no rush to cut the policy rate. Recent data tells me that it is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought to help keep inflation on a sustainable trajectory toward 2%”, hence the first part of the title of this letter. Inflation has been stuck around 3.2% for the past 9 months.

As for macroeconomics, the US GDP for Q4 2023 was revised upward to 3.4%, the composite Purchasing Managers’ Index (PMI) remains in expansion both in manufacturing and services. All the ducks are aligned for a blue-sky scenario.

Though the European stock market is also performing well, the economy is much less encouraging than in the US. The muted Chinese economy, depressed manufacturing activity, unsteady consumption and lack of liquidity in weighting more heavily on Europe in the higher rate environment. With inflation at 2.6% in the euro area, the ECB will probably be able to cut rates in June, with 4 cuts being priced for 2024.

The big surprise came from the Swiss National Bank, which is the first major central bank to cut rates to 1.5% from 1.75%. The strength of the Swiss franc played an important role in fighting against inflation (cheaper imports), the latest reading showing 1.2% versus a target of 2%. Economists expect 2 further cuts by year end. The exchange rates strongly penalized Swiss companies, as the performance of the Swiss Market Index in 2023 clearly demonstrates. In this context, the SNB decided to intervene, though it claims it has no exchange rate target.

Our summary recommendations

Our long exposure to the stock market continues to benefit from the market performance, but we also add downside protection to existing structured products, as the distance from the strike increases.

As bonds mature, we are reinvesting in quality names with a duration of 2-2.5 years in order to lock a still attractive yield, before rates go down.

We continue to explore new alternative investments, which are rather decorrelated with stock markets and provide attractive and less volatile long-term returns, even though we already have an overweight in this asset class.

Chart of the month

The chart of the month is replaced by a caricature from 1981. Caricatures are meant to be an exaggeration of certain characteristics, but it hardly seems exaggerated and shows that some things don’t change.

The Fed acts when it must, the ECB when it can and the SNB when it wants

April – Inflation Return

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