Podcast Summary
Micro market environment with low correlation between stocks: Active investors can capitalize on stock dispersion in the current micro market environment, with notable alpha contributions from longs and shorts across regions.
The current market environment is unusually micro, with a low correlation between individual stocks, making it an ideal time for active investors to engage in stock picking. According to Morgan Stanley strategist Andrew Sheets, this micro environment has led to strong equity long short alpha in the first quarter of 2024, with notable contributions from both longs and shorts across the US, Europe, and Asia. While macro factors like central banks and geopolitics continue to influence market performance, the historically low correlation between individual stocks indicates that other forces are at play. Despite slight gains in stocks and a downward trend in treasury yields, the currency market is currently the most volatile, with the Japanese yen experiencing significant swings following intervention from Japanese financial authorities. Overall, this market environment presents opportunities for active investors to capitalize on the dispersion between individual stocks, while also managing risk in a relatively stable macroeconomic climate.
Japan's yen stability relies on MOF and BOJ actions, stronger economy, and peaked yields: The yen's stability and potential rally hinge on more aggressive policy measures from Japan's Ministry of Finance and Bank of Japan, along with clearer economic growth indicators and peaked treasury yields.
The Japanese yen's stability and potential rally depend on more aggressive policy actions from the Ministry of Finance and the Bank of Japan, as well as clearer signs of stronger economic growth and peaked treasury yields. Elsewhere, Tesla's rally reached new heights following Elon Musk's China visit and reports of a partnership with Baidu. Chinese electric vehicle makers Nio, Li Auto, Xpeng, and BYD also experienced gains. SoFi Technology fell short of analyst expectations for its Q2 2024 revenue and EBITDA. Apple, which was downgraded to outperform from market perform by Bernstein, has faced concerns over a weak iPhone cycle and impaired China business, but historically, its China business has shown higher volatility than its overall performance. Lastly, AMD may offer in-line or slightly weaker guidance when reporting Q1 results due to the frail PC market, and recent checks suggest it may have lost some share in both notebooks and desktops.
Goldman Sachs strategist links high quality stock outperformance to investor concerns over cost of capital: Goldman Sachs strategist David Costin suggests recent high quality stock outperformance is due to investor concerns over cost of capital, potentially reversible if Fed's rate cut plans change or earnings growth improves, new additions to the basket include Lululemon, Hershey, Kotera Energy, Northern Trust, Charles River Labs, KLA, and F5.
Goldman Sachs strategist David Costin believes the recent outperformance of high quality stocks, such as those with high returns on capital, can be attributed to investor concerns over the cost of capital rather than profit growth. This shift is a departure from previous periods of strong S&P 500 profit growth, where quality stocks typically underperformed and traded with lower valuation premiums. If the Federal Reserve proceeds with interest rate cuts later this year and those concerns recede, quality stocks may give back some of their recent gains. However, if the earnings growth outlook deteriorates, the recent stretch of quality outperformance is expected to continue and potentially expand to include stocks with stable growth. New additions to the basket include Lululemon, Hershey, Kotera Energy, Northern Trust, Charles River Labs, KLA, and F5. It's important to note that this trend could reverse if the Fed's rate cut plans change or if earnings growth picks up. Stay tuned for updates on Seeking Alpha.