Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.
Large technology companies led the fall in equity prices last week. Communications services were the weakest sector, dragged 3.64% lower following results form index heavyweights Alphabet (GOOGL) and Netflix (NFLX). Meta Platforms (META), the largest position in the Morningstar US Communication Services index, reports this week. You can find out what Morningstar analyst Michael Hodel is expecting from the social media giant here.
Small Company Stocks Outperform
Although falling stock prices create a better opportunity to buy, savvy shoppers know that there is a difference between a ’sale’ (when prices are reduced) and a ‘bargain’ (where prices are below their true value). While prices have fallen over the last couple of weeks, large technology-oriented companies are not yet in bargain territory. In contrast, smaller companies, especially those in traditional industries have been trading at thrift-store prices for months and have recently fared better than their larger peers with the Morningstar Small Companies index finishing the week 2.14% higher.
US Economy Shows Strong Growth
While politics dominated the headlines this week, there was plenty to keep economic commentators busy, as the latest GDP measure of the US economy was surprisingly strong at 2.8% annual growth, spurred on by stronger consumer spending. Further good news was provided by the Personal Consumption Expenditure (PCE) measure of inflation which was in line with expectations at an annual rate of 2.6% for core inflation. Higher growth and low inflation are an appetising combination which cheered investors at the end of the week and took the edge off the prior falls. It is important to remember that all economic data is backward looking while investment is always a function of expectations. The role of expectations and the opportunities in assets with lower expectations are discussed in this article by Morningstar chief investment officer, Philip Straehl.
Attention Turns to the Fed Again
As we approach the next interest rate decision of the Federal Reserve Open Market Committee (FOMC) on Wednesday, investors have become more optimistic about the number of interest rate cuts this year with CME FedWatch indicating a 64% probability of three or more interest rate cuts by the end of this year, compared to only 18% a month ago. In contrast, longer term bond yields have remained relatively stable with the 10-year Treasury yield falling only 0.2% over that same period. Nervous investors would have preferred bond yields to decline further as equity prices have fallen, helping to balance their portfolios. But an environment where government bonds continue to yield more than inflation creates a stronger foundation for accepting investment risk.
