Despite a decline in April, stock markets have shown positive returns year-to-date across various regions and indices. The S&P 500 has gained 5.5% thus far, while the SMI has shown comparatively less momentum internationally, with a rise of 1.1% (including dividends at 3.9%). Bond markets have experienced a downturn during the same period, with global investment grade bonds falling by approximately 3% in CHF terms this year. Despite robust economic indicators such as a strong surge in US wages and retail data, GDP growth in Q1 2024 was merely 1.6% annualized, marking the first quarter of below-average growth since Q2 2022. Inflation remains persistent, and recent data suggest continued price pressures. Consequently, the prospect of imminent rate cuts by the Federal Reserve has significantly diminished. Fed Chair Powell has clarified that interest rates should not rise this year. Other major central banks, such as the European Central Bank and the Bank of England, may lower rates before the Fed if the sluggish growth does not improve. The Eurozone's growth stood at 0.3% over the previous quarter, while inflation in April remained steady at 2.4%. The World Bank warns that an escalation of conflicts in the Middle East could further drive up commodity prices, especially for Brent crude, the global benchmark, which could average $84 per barrel in 2024. Additionally, the costs of critical metals needed for the global energy transition, such as copper and aluminum, are expected to rise throughout the year. These projections could pose renewed challenges for the global economy, particularly potential energy price shocks that could trigger a resurgence in inflation. The balancing act between monetary and fiscal policy, inflation, and growth is becoming increasingly challenging.
Stock markets experienced a turbulent and generally negative phase at the end of April due to concerns about persistent inflation and its impact on Federal Reserve's interest rate policy. The S&P 500 recorded its worst month since September, thereby ending the winning streak maintained from November to March. Growing concerns that the Fed may need to maintain higher interest rates longer to manage inflation have intensified pressure on stock markets. These challenges have somewhat overshadowed solid earnings reports in the market. Recent earnings reports indicate that over 80% of US companies exceeded earnings expectations, with a year-over-year increase of 4.7% for Q1. The SPI Index dropped 2.4% in April, the Dow Jones Index declined by 5.0%, and the Euro Stoxx 50 fell by 3.2%. AI stocks in the USA, which had been showing strong earnings growth, faced more significant setbacks. The absolute losses were notable with figures for Nvidia at -$85 billion (Q1 earnings at 1000 billion), Microsoft at -$210 billion (330 billion), and Meta at -$140 billion (330 billion).
The yields on two-year US Treasury bonds exceeded the 5% mark for the first time since November 2023, and the Dollar Index posted its fourth consecutive monthly gain, the longest winning streak since September 2022. The USD reached 0.92 CHF. Despite a stronger USD and higher interest rates, the price of gold continued to rise, experiencing profit-taking towards the month's end. On a monthly basis, gold appreciated by nearly 2.5% in USD terms. The strength in gold is also evident over the long term, as over a five-year period, it outperformed global equities, with a 74% return compared to 69% in global equities in USD terms. Over a three-year period, gold also led (+28% versus +20% for global equities). This dynamic might reflect a changing outlook for the global order, where geopolitical risks increase and fiscal policy shifts from austerity to significantly higher government spending, while deglobalization accelerates.
Given the high government expenditures aimed at enhancing prosperity and countering geopolitical threats, there is a risk that inflation and therefore interest rates might remain structurally higher. The fiscal measures, accompanied by substantial deficits, are to be understood in the context of diverse, global challenges including climate change, security, defense spending, and deglobalization. These factors lead to structurally higher government expenditures, which central banks attempt to offset through tighter monetary policy, thereby necessitating higher interest rates. This might boost economic growth in the short term. For equity investments, a balance must be struck between the potential impact of higher interest rates and growth prospects. The investment environment for equities could be supported mid-term by higher deficit spending, while inflation outlook introduces uncertainty. Opportunities are identified in long-term themes of energy transition and reindustrialization, as well as in the technology sector, which fosters advancements in artificial intelligence. Bonds primarily serve as recession protection, but due to state spending and inflation, this protection is only effective during a severe recession. Given these challenges, we continue to underweight bonds in favor of broad equity diversification across various countries and sectors. Gold serves as a safeguard against unrestrained fiscal expenditures and geopolitical shifts.