Q1 Market Wrap 2024

30.04.24 Uncategorised By Anthony Hourigan
Q1 Market Wrap 2024

Performance

It was a solid start to equity markets for the 2024 calendar year. Many were wondering if the market would continue from the Christmas rally we saw in December, and while the first few days of the year were down, they seem a distant memory now. Returns for the Jan – March quarter were as follows:

ASX                  + 4.03%

S&P500           +10.15%

NASDAQ          + 9.11%

There was enough encouraging economic data over the quarter to boost investor sentiment, not least of which was that the US economy grew more than expected during the fourth quarter of 2023. This combined with other strong macroeconomic data contributed to the positive performance globally.

Interest Rates – Still a Focus, But Not The Focus

While investors the world over have an eye on interest rates and what Central banks will do next and when, it’s certainly not the focus it was of the last two years. Rates have now stabilised after their historically rapid successive rises, and markets have come to digest what these levels of rates mean. As with any influencing factor on markets, once the degree of certainty is higher, markets tend to react more positively, and we have seen that with rates. Compare that to two years ago when rates were rising at a  never-before-seen velocity, and markets couldn’t behave normally until there was certainty – one way or the other – on when rates would normalise.

 

In Australia, with our official RBA cash target rate at 4.35% it sits relatively close to our long-term average (see chart below), and in the US at 5.5% it’s a similar story. Rates are just one of the many inputs into any pricing model, and until you have certainty on them, it’s difficult to price assets. Now that we have more certainty, valuing assets can be done with more confidence, and this promotes more active investment. This is the point we’re at now in markets, after a few years of heightened uncertainty around a key input. One of the very positive outcomes of this is that corporate activity increases – expect more IPOs, capital raisings and other corporate activities this year than we’ve seen over the last two.

 

Australia Cash Rate Target 1990 – 2024 

 

Source: https://www.rba.gov.au/statistics/cash-rate/

 

In Australia, bond markets have the first rate cut priced in for around 9 months’ time. That can change, obviously, and for there to be rate cuts, Central banks need to be comfortable they have inflation under control. They’re closer to that now than a year ago, but they’re not quite there yet – as evidenced by the higher-than-expected headline consumer inflation number in the US last week.

 

Corporate Earnings

 

First quarter earnings released in April have provided a glimpse into the health of the US economy, and so far, so good! Of the companies that have reported so far, including most of the major banks, three quarters of them have reported positive EPS surprises, and more than half have reported higher revenue surprises.

 

EV Demand in Question

 

Demand for electric vehicles the world over has been softening, and fast. While last year global EV sales increased from $3m to $14m with forecasts of similar growth, actual volumes have led some of the majors to cut forecasts to around 10% growth.

 

Why are EV sales relevant to markets? Well, in addition to the EV manufacturers – and there are many more than just the obvious, Tesla – there are many commodity companies directly affected by this, particularly lithium producers since lithium is a key input into lithium-ion batteries that power EVs.

 

EV Stock Performance Q1 2024

Source: https://www.visualcapitalist.com/almost-every-ev-stock-is-down-after-q1-2024/

 

The price of lithium carbonate is currently trading at around 20% of the peak in November 2022 (see chart below), so you can imagine the effect on the lithium producers. Albemarle, the world’s largest producer, is currently trading at $112 from a high in November 2022 of $335; Pilbara Minerals is trading at $3.80 from a high of $5.66. These two companies are at least producing. The picture is far bleaker for explorers.

 

Lithium Carbonate Price Chart – 5 Years

Screenshot

Source: https://tradingeconomics.com/commodity/lithium

 

My belief is that the next phase of the cycle is that the larger producers with strong balance sheets, e.g. Albemarle and Pilbara, will begin acquiring quality assets at distressed levels. That being the case, when the commodity turns, they will do extremely well.

 

While I don’t profess to be a commodity expert, I would say that if you think we are somewhere near the bottom of the lithium cycle, and you want exposure – look for profitable producers with strong balance sheets. They have the strength to weather the storm, then come out the other side in better condition than they went into it due to a greater suite of assets. This being the case, they then benefit from the upswing to a greater degree than the pain on the downswing.

 

Looking Ahead

 

Looking at what’s to come for markets, one of the bigger events for the year will be the US presidential elections in November. It seems crazy that we’re talking about Trump (a failed casino operator and reality TV personality) as a realistic chance of a second term, but here we are. Should he be elected, it’s probable that markets would react favourably, as he has proven to be pro-business. He has walked that walk in terms of tax cuts. However, he’s also extremely volatile when it comes to trade negotiations. Heightened tensions with China would be less than ideal for markets. He has been vocal in his criticism of Federal Reserve monetary policy, and would likely try to exert influence on them to lower rates quicker. Many variables, but overall a Trump re-election would likely be positive for markets initially, however would come with increased volatility.

 

Until next quarter – onwards and upwards!

 

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General Advice Warning: Any advice given herein is general in nature and has not taken into consideration your personal financial objectives, situation or specific needs. You should consider the appropriateness of the advice as it relates to you before acting upon it. Always consult the relevant Product Disclosure Statement before making any investment decision relating to a specific product that has been mentioned.

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