April was a muddle through month where most markets ended where they started, some having moved about a bit more than others. The Nasdaq, and by extension the US market, continued to be the lightning rod for risk, but ended the month just in positive territory. Emerging markets were slightly down, while the biggest winner was Japan. The Japanese market was at first buoyed by Warren Buffet increasing his bet on some of the traditional Japanese listed commodities trading houses, but the halo effect seems to be spreading to the rest of the market. The best overarching narrative around this seems to be that Buffet’s imprimatur is dislodging the ‘value trap’ label that has afflicted the market. Even though corporate earnings were relatively robust throughout COVID and remain strong, cheap has just been getting cheaper as disenchanted once (or twice) bitten global investors have stayed away.        

The US earnings season has been fairly positive, with most companies beating subdued expectations across most sectors. The biggest beats have been amongst Consumer Discretionary stocks, with those that have reported disclosing earnings that are up 17% year on year, rather than down 5% as expected. This has underpinned a wider narrative around a strong US consumer that is keeping the US economy buoyant. It is also one that runs counter to the Federal Reserve’s mission to dampen inflation, and perhaps more importantly expectations thereof. Even smaller company earnings have only slightly contracted. However, the 30% drop in real estate company earnings has materialised as expected, while more industrially sensitive materials earnings are also going backwards in a similar manner. This also supports the notion that there might be continued upwards pressure on CPI even as the underlying ‘real’ economy starts to weaken, something which was reflected in stock price moves at a sector level. Many of the large tech names that reported strong earnings have not moved much, while defensive sectors like Consumer Staples, Healthcare, and Utilities were all up around 4% for the month globally. Equity analysts saw nothing in the recent numbers or the guidance of CEOs to sound the economic alarm bells, but the share market is perhaps looking further out and positioning for a recession. Energy and commodity markets (not least iron ore) seem to concur with the recessionary thesis, while gold has been heading higher.        

In Australia the dominant banking and mining stocks languished, as question marks remained over the path of domestic inflation and global growth respectively, while every other sector was a few percent in positive territory. The traditionally defensive healthcare and utilities stocks led the way but were, perhaps surprisingly, joined by domestic Real Estate Investment Trusts which have been surprisingly resilient lately.

Central banks around the world have continued to raise rates this week (including the RBA to the surprise of many) and generally trying to sound quite hawkish. However, long term rates have only ticked up slightly, one more piece of evidence pointing to expectations of an imminent slow down.   If this sounds all a bit gloomy, credit markets appear slightly more sanguine. This is where expectations of a looming recessionary default cycle might be expected to show up first. Having ticked up around the time of the Silicon Valley bank default, they have stabilised in recent weeks, and remain below the level implied by the post Dot Com recession and in line with the ‘growth scares’ of 2015 and 2018. This would imply that for now corporate bond markets are banking on a soft landing.

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