Week from the 25th to the 28th of March

Most Outstanding Points of the Week

  • In the United States, it was a short week for markets and economic activity, with consumer confidence showing no substantial changes during March. 
  • In the US, Raphael Bostic of the Atlanta FED estimated only one cut this year of 25bp, in contrast to his previous forecast of two cutbacks.
  • In China, the profits of industrial companies grew by 10.2% YoY in February.
  • In Brazil, the minutes of the last Central Bank meeting noted that discussions emerged about more modest cutbacks to the reference rate in the future, citing the risk of growing uncertainty both domestically and internationally.

Important Events in the Coming Weeks

  • In the United States, manufacturing and services indicators (ISM) will be released 04/1 – 3 
  • In the United States, employment figures to be released 04/05

Monitor

*For this occasion, the yields are presented at the close of March 27.

Expectations for the 1Q24 corporate reports

Quarterly earnings season will begin in the coming weeks. The most recent report indicates that the analyst consensus anticipates annual earnings growth for the S&P 500 of 3.4% (YoY) for the first quarter of the year. If confirmed, this could mark the third consecutive quarter of YoY earnings growth for companies. However, this estimate is lower than the 5.7% YoY increase that analysts estimated at the beginning of the quarter.

Six of the eleven sectors are projected to report YoY earnings growth, led by the utilities, technology, communication services and consumer discretionary sectors. In detail, it highlights the expected 20.3% YoY earnings growth in the technology sector, where NVIDIA, Microsoft and Micron Technology have been the main contributors to this increase. In the case of the consumer discretionary sector, Amazon.com and cruise companies stand out as the main factors behind the expected growth of 15.3% YoY. On the other hand, four sectors are expected to report a YoY decline in earnings, led by the energy and materials sectors in the face of lower commodity prices. Finally, the industrial sector is expected to report an unchanged (0.0%) YoY earnings performance. 

At the revenue or sales level, the consensus forecasts a 3.6% YoY increase, which is below the average revenue growth of the last 5 years (+6.9%) and below the average revenue growth of the last 10 years (+5.0%). Nonetheless, if the 3.6% expected revenue growth were to materialize, revenues would accumulate fourteen quarters of positive growth. With this combination of factors, the net income margin for the quarter would be 11.6%, practically the same as in 1Q23, although better than the 11.5% average of the last five years.

Analysts continue to project that earnings and revenues for the full year could reach increases in the order of 10.9% and 5.1%, respectively. 

As is customary, JP Morgan will kick off on April 12; therefore, investors’ focus will be on the development of the season, amid a high level of optimism for the AI boom and the prospect that the first interest rate cutbacks could occur later this year. 

S&P 500: expected earnings growth for the 1Q24

Source: FacSet

Week from the 18th to the 22nd of March 2024

Most Outstanding Points of the Week

  • In the US, the Fed left the federal funds rate range unchanged at 5.25% – 5.5%, as widely expected. However, it reaffirmed that there will be three 25bp cuts in the remainder of the year.
  • In the United States, the main economic indicators that stood out were the good results of the real estate sector in February.
     
  • In China, retail sales grew 5.5% annually, exceeding expectations of 5.2%. On the other hand, industrial production increased by 7%, and exceeded estimates.
     
  • For the first time in three years and in line with market expectations, the Bank of Mexico cut the reference rate by 25bp to 11%.

Important Events in the Coming Weeks

  • In the U.S., consumer confidence will be known 03/26
  • In the U.S., the 4Q23 GDP to be published 03/28

Monitor

Expectation of 3 rate cuts for this year still lingers

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The Federal Reserve (FED) made the unanimous and widely anticipated decision to once again leave the target range for the federal funds rate unchanged at 5.25% – 5.50%, its highest level in the last 22 years. Since July 2023, the FED has not changed the target range. This decision comes in the context of accelerating inflation, which reached 3.2% annually in February (3.8% annually excluding the most volatile components such as food and energy), along with an increase of 275,000 jobs (versus 198,000 estimated).

In this context, the statement described that the latest employment indicators have shown solid performance, while inflation remains elevated despite its notable reduction over the last year. Additionally, the statement reiterated that the Committee does not expect it to be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%, while it will continue to monitor the implications of incoming information for its future decisions.

On the other hand, the FED updated its macroeconomic perspectives, reaffirming that there will be 3 rate cuts of 25 basis points (bps) in the remainder of the year, unchanged compared to December’s estimate. This would bring the federal funds rate to 4.6% from its current average level of 5.4%. By 2025, it could end at 3.9% from 3.6%. As for the economic scenario, the new estimate underwent a notable upward revision, with GDP growth of 2.1% from the previously estimated 1.4% by the close of 2024. By 2025, strength could be maintained with growth of 2% from the 1.8% previously forecast. These scenarios place the economy at growth very close to its long-term potential of around 2%. The unemployment rate remained unchanged for both years at around 4%. However, estimated core inflation (excluding volatile components such as food and energy), as measured by the Core PCE, rebounded slightly to 2.6% from 2.4%, while the estimate for 2025 remained at 2.2%.

During his press conference, Jerome Powell confirmed that the federal funds rate has peaked. Additionally, he reaffirmed the commitment to return inflation to its long-term target of 2% and expressed confidence that eventually we will begin to see less pressure related to services and housing costs, which have been affecting core inflation. However, Powell noted that the timing of when this may occur is difficult to estimate.

Economic projections of Federal Reserve (March vs. December)

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Source: Federal Reserve

Week from the 11th to the 15th of March

Most Outstanding Points of the Week

  • In the United States, February’s inflation advanced 0.4% in the month, reaching an annual rate of 3.2% from 3.1% in January and the 3.1% expected.
  • In the United States, the FED’s monetary policy announcement will take place next week and the consensus indicates that there will be no change in the federal funds rate.
  • In China, after four months of deflation, inflation accelerated in February by 0.7% annually. 
  • A deputy governor of the Bank of Mexico stated that there is room to adjust the reference rate ahead of the next meeting on March 21st.

Important Events in the Coming Weeks

  • In the U.S., there will be a monetary policy announcement from the FED 03/19 – 20
  • In the U.S., housing sector indicators to be released 03/19 – 21

Monitor

How has the Federal Reserve acted on election years?

With monetary policy generating much anticipation in the macroeconomic and financial outlook for this year, it is inevitable that investors will wonder how the presidential election might influence the Federal Open Market Committee (FOMC). Historically, the Federal Reserve (Fed) has not stood on the sidelines during election years but has continued to pursue its dual mandate of price stability and maximum employment, always seeking to maintain its independence from politics. Since 1980, the Fed has adjusted rates in every election year, except in 2012 when rates were at zero due to the recovery from the financial crisis.

The Fed lowered rates in five election years and raised them in five others. In 1980, the Fed raised rates by 1% (the federal funds rate, Fed Funds, had hovered around 17% earlier that year). It then cut back rates by 5.5% between February and July as the economy entered a recession. However, it resumed rate hikes to combat double-digit inflation between August and November (the Fed Funds closed that year around 19%). In 1984, the Fed raised rates by 2.25% in the second quarter as inflation rose and unemployment declined, only to reduce them by 3.5% in the fourth quarter as inflation stabilized. In 1988, the Fed began the year with modest rate cutbacks, then raised rates through August and resumed hikes after the election.

On the other hand, in 1992, it concluded the consecutive rate reductions initiated at the beginning of the 1990-1991 recession and implemented its last reduction in January 1996 after the soft landing that followed the 1994-1995 hiking cycle. Also, the Fed concluded its May 2000 hiking cycle, which began in 1999, noting that the stock market was peaking in March 2000.

In 2016, the Fed waited until after the election to hike once in December and continued with rate hikes in 2017 and 2018. It is also relevant that the Fed entered new monetary policy cycles that required an accelerated reaction, as in the severe recessions of 2008 and 2020, respectively.

In this context, it can be seen that the Fed continued to pursue its dual mandate goal, regardless of the political issue. This year is expected to follow a similar pattern, with a potential decrease in the Fed Funds rate as inflation approaches the 2% target, and the economy experiences a ‘soft landing.’

Note: A soft landing in the economic cycle is the process by which an economy moves from accelerated growth to slow growth, potentially reaching a stagnation phase, although it avoids going into recession.

Changes in monetary policy in an election year.

Net change in the federal funds rate, %.

Source: JP Morgan 

Week from the 4th to the 8th of March

Most Outstanding Points of the Week

  • In the United States, the February nonfarm payroll rose in 275,000 jobs, exceeding the 200,000 job expectation. Meanwhile, the unemployment rate rose to 3.9% from 3.7%. 
  • In the United States, Jerome Powell told legislators that interest rate cutbacks will depend largely on the direction of the economy.
  • In China, the government announced a growth target for this year of “around 5%” and the issuance of special bonds for large projects.
  • In Brazil, the debt to GDP ratio rose to 75% in January, an increase of 70 basis points from December. This increase was due to the impact of accrued interest on debt.

Important Events in the Coming Weeks

  • In the United States, February’s inflation to be announced 03/12
  • In the U.S., industrial production will be published. 03/15

Monitor

Global Monitor of Inflation: persistent at 3%

According to JP Morgan’s monitoring, both headline and core global inflation, excluding China and Turkey (where China is experiencing deflation and Turkey has a double-digit inflation rate), increased slightly by 0.3% on a monthly basis in January. While their annual variations continued to decline, headline inflation rebounded to 2.6% in the last three months up to January. Core inflation (excluding volatile components such as food and energy) also saw a slight increase, reaching 3%.

U.S. core goods prices, excluding autos (e.g., apparel, electronics, furniture, etc.), rebounded by 0.16% monthly in January, indicating the end of global goods price deflation in the first half of 2024. Another interesting point to note is that container shipping costs have surged by 150% since the beginning of December. However, supplier lead times still remain near historical levels, suggesting limited impact so far due to geopolitical tensions in the Middle East. Additionally, oversupply in China continues to exert downward pressure on manufactured goods prices.

Furthermore, there was a 0.5% monthly increase in services prices, driven by a 0.7% increase in the United States. Core services (e.g., shelter, medical services, education, etc.) increased by 0.46% on a monthly basis, marking their largest increase since December 2022, pushing the annual rate for the last quarter above the 4-4.5% range. Much of this rebound was attributed to the increase in the United States, reaching an annual rate of 6.2%, while services inflation in developed countries, excluding the U.S., remained stable at 3% annually. Particularly noteworthy was the continued pressure on shelter costs in the United States.

Global food inflation remained stable at close to 3.5% annually, although food inflation in emerging markets accelerated to 6.5% annually. The latter was due to a spike in the weather phenomenon known as “El Niño,” causing localized increases in fresh food prices in Mexico and Brazil.

With this mix of factors, core inflation (a metric of particular interest to central banks) at the global level is expected to rebound to 3.3% in the first quarter of 2024, compared to 3% in the fourth quarter of 2023. In this context, conditions suggest that monetary authorities, especially within developed countries, may temporarily postpone interest rate cutbacks, pending clearer signals of more significant cooling in key categories such as essential services and housing.

 Global Consumer Price Index (CPI) headline and core (excluding China-Turkey), monthly variation (%)

  • The dotted lines refer to the three-month moving average. 

Source: JP Morgan

Week from the 26th of February to the 1st of March 2024

Most Outstanding Points of the Week

  • In the United States, the second estimate of the 4Q23 GDP showed an annualized growth of 3.2%, slightly lower than the first revision of 3.3%.
     
  • In the United States, the PCE index, a key inflation metric for the Fed, advanced 0.4% in January. This brought the annual rate to 2.8% and was in line with expectations.
     
  • In China, manufacturing activity contracted for the fifth consecutive month during February.
  •  The Bank of Mexico downgraded its growth estimate for this year from 3% to 2.8%, due to the slowdown observed in the economy in the last quarter of 2023.     

Important Events in the Coming Weeks

  • In the United States, ISM services and Beige Book will be published 03/5-6
  • Employment figures to be released in the United States 03/08

Monitor

Letter from Warren Buffett in 2023 to Berkshire Hathaway shareholders

Recently, the renowned investor and Berkshire Hathaway Chairman, Warren Buffett, shared his annual 2023 letter with the company’s shareholders. Similar to previous years, the letter places less emphasis on ‘news’ and more on providing valuable reminders to investors on successful investment strategies, articulated in Buffett’s distinctive style.

Buffett on investing: “Although the stock market is considerably larger than in our early years, today’s active participants are neither more emotionally stable nor better educated than when I was in school. For whatever reasons, the markets now exhibit much more casino-like behavior than when I was young. The casino now resides in many homes and tempts its occupants daily.”

In this context, Buffett’s new letter reiterates some of the principles that have contributed to Berkshire’s success over time, including:

  1.  Be clear about the purpose of investing.
  2. Focus on quality investments, or as he would say in his own words, “wonderful businesses”.
  3. Prefer companies run by good management teams. 
  4. Stay for the long term, as patience pays off.


As part of his investment philosophy, Buffett highlighted the holding of two stocks that Berkshire could maintain indefinitely, namely Coca-Cola and American Express. These examples emphasize the importance of “sticking with a truly wonderful business” and how “patience rewards, and a wonderful business can make up for the many mediocre decisions that are inevitable.”

This year, Buffett emphasized two additional long-term investments that he expects Berkshire to hold indefinitely. The first is Occidental Petroleum (OXY), a key player in oil and gas and a leader in carbon capture initiatives. The second involves holdings in five large Japanese financial conglomerates: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. He highlighted their good management teams, as well as shareholder-friendly policies, including share buybacks when the price is right, reinvestment of profits to develop their businesses, and reasonable compensation for their executives.

Concerning the succession plan for Warren Buffett, Berkshire supporters have long assumed that Greg Abel, responsible for managing Berkshire’s non-insurance operations, could be the successor. Buffett all but confirmed this notion, noting that Abel “in all respects is ready to be Berkshire’s Chief Executive Officer (CEO) tomorrow.” However, investors may learn more on that topic at Berkshire Hathaway’s annual meeting on May 4th in Omaha. 

Finally, on a separate note, Buffett pays tribute to Charlie Munger, who passed away last November, crediting him with guiding Buffett (and subsequently Berkshire) to quality companies. Buffett acknowledges Munger as the “architect” of today’s Berkshire.

Main investments within the Berkshire Hathaway portfolio

Source: CNBC with Berkshire Hathaway data

* Holdings are as of December 31st, 2023, as reported in Berkshire Hathaway’s 13F filing on February 14th, 2024, except for: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo, which are as of June 12, 2023. Also, Occidental Petroleum, which is as of February 5, 2024. At December 31 Berkshire held a cash and cash equivalents position of US$168bn. 

Note: The companies cited in the image do not necessarily constitute an active Axxets/Activest recommendation and are for informational purposes only.