After 5 months of continuous growth, the main stock indices took a break and slightly declined in April. The EuroStoxx 600, the S&P 500 and the Nasdaq fell by -1%, -3.1% and -3.4% respectively between March 31 and April 30.
Since its lows of last October, the European equity market had climbed nearly 17%. It is therefore not very surprising for it to take a breath. However, it would be wise not to stop the analysis here. The most striking phenomenon actually occurred in the bond market. Interest rate cuts expectations, especially from the FED, have now been pushed out and lowered against a strong macroeconomic backdrop. At the beginning of the year, market participants thought there would be no less than 6 consecutive 0.25% rate cuts in 2024. After three US inflation releases in February, March, and April, each slightly exceeding expectations, the market now only expects one cut, in November or December. It is an understatement to say that some people’s hopes have been dashed. For years, perhaps decades, everyone had become accustomed to having a very accommodating FED, always ready to inject liquidity at the slightest sign of market nervousness. It is increasingly clear that this period is over. We believe this disappointment is the cause of the decline in US indices this month and of the pronounced sector rotation in recent weeks.
The technology and semiconductor sectors in particular struggled in April. Some stocks, such as AMD, a graphics processors manufacturer and competitor of Nvidia, which we do not hold in our portfolio but closely monitor, plummeted by -10% after its earnings release, even though the results and outlook were in line with expectations. The market had skipped steps in hopes of more and faster and had to abruptly return to some more grounded expectations.
Conversely, China and the industrial cyclical sectors are now showing tangible signs of rebound. Europe too. Our positions in mining companies, for example, which had been lagging since the beginning of the year, have rebounded strongly in the wake of the rise of most metals, and chief among them copper.
We also note an exacerbated volatility of stocks during their earnings releases, including for giant companies like Alphabet or Meta, which respectively surged and dropped by more than 10% on earnings day. The magnitude of these movements, which has not been unusual in the past in the small-cap sector due to their lack of liquidity, is to some extent more recent for large caps and could be related to the dominance of large Hedge Funds in the volumes traded in the market. These funds are eager to “play the quarterly earnings” and to position themselves heavily accordingly before the results, and then to unwind violently once the numbers are out. Therefore, we believe long-term investors should take this volatility with a pinch of salt and not overreact. It is necessary to distinguish between short sighted market exuberance and true warning signals, which can only be spotted via rigorous financial analysis.
Clartan funds are down in April: Valeurs declined by -1.4%, Europe by -1.2%, Ethos by -2.8%, Evolution by -0.7%, and Patrimoine by -0.2%.