Last week was characterized by solid economic dataweaker asset prices and guidance from the Federal Reserve to investors that they should temper expectations for short-term interest rate cuts.
Consequently, the estimated probability among investors of at least four quarter-point interest rate cuts by the end of 2024 has fallen from 49.7% a month ago to 21.4% at the end of last week, according to CME Fed Watch. Investors may be slow to incorporate new information and so we may not see the impact of this change in expectations immediately, but it is likely to act as a headwind to further increases in the stock's valuation.
What will interest rates do?
As expectations of a drop in interest rates diminished, government bond yields continued to rise, with the two-year Treasury yield rising to 4.76% at the end of the week. While the path of inflation and interest rates is naturally uncertain, in Morningstar's view, check out senior U.S. economist Preston Caldwell's second-quarter economic outlook. here.
QT has replaced QE
In addition to managing interest rates, another key challenge facing the Federal Reserve is how to undo the so-called quantitative easing that was used to support asset prices and economic activity for the past 15 years. (The reduction is known as quantitative tightening.)
While many economic commentators deemed it necessary at the time, addressing the fallout could have a significant impact on asset prices. Given the importance of this topic, Morningstar Wealth's Marta Norton has dedicated her most recent column 'From the CIO's Desk' to the topic. You can find it here.
Energy stock prices
Investors welcomed stronger-than-expected job growth on Friday with the Morningstar US Market Index increasing 1.1% on the day. However, that same index fell 1.01% during the week as investors adjusted their expectations. A positive point for investors were the gains in the price of energy companies with the US Morningstar Energy Index up to 3.69% during the week and 17.42% so far this year. This places it far ahead of the Morningstar US Communications and Technology Services Index, with an increase of 12.44% so far this year, dominated by companies as admired as Microsoft MSFTApple AAPL and Nvidia NVDA. This is an important reminder that the most popular companies don't always offer the highest returns. Morningstar analysts continue to see attractive opportunities in this part of the market. Energy analyst Stephen Ellis offers his opinion here.
The profit game begins again
There's likely plenty of news to keep headline writers busy this week with Wednesday's Consumer Price Index report, comments from several Federal Reserve chairs toward the end of the week, and the start of trading season. quarterly company reports. Financial services take center stage this week with JPMorgan Chase JPMCiti group cWells Fargo CFMstate street STT and Black Rock BLACK all reports the same day. As always, companies will look to lower expectations ahead of results to create a "surprise" that they hope will subsequently boost their share price.
While this tedious game is what passes for entertainment on Wall Street, it has little to do with investing. Reporting season is rather an opportunity to compare companies' most recent results with an investor's long-term investment โthesisโ and consider whether the results fall within the normal range of company performance or confound that thesis. Naturally, this implies that the investor has that thesis. For those who lack that thesis, reporting season primarily provides an opportunity to make mistakes through overreactions.
This week's key investment and market events:
Wednesday April 10 - March Consumer's price index report.
Thursday April 11 - March Producer Price Index report.
Friday, April 12: First-quarter earnings season begins with reports from BlackRock, JPMorgan Chase, Wells Fargo and Citigroup.
Click here to see our weekly calendar of economic reports and corporate earnings..
Statistics for the trading week ending April 5
- The Morningstar index of the US market fell 1.04%.
- The sectors with the best performance were energy, with an increase of 3.66%, and communications services, with an increase of 0.90%.
- The sector with the worst results was healthcare, with a drop of 3.03%.
- US 10-year Treasury yields rose to 4.39% from 4.20%.
- West Texas Intermediate crude oil prices rose 3.25% to $86.69 per barrel.
- Of the 704 U.S.-listed companies covered by Morningstar, 166, or 24%, rose, two were unchanged and 536, or 76%, fell.
What stocks rose?
Dell Technologies DELLNewmont NOsaber SABRChampionX CHXand energy of freedom RTGS.
What stocks fell?
Weston Lamb L.W.PVC PVCRH RHgroupon GRPNand Ulta Beauty ULTA.
