At a glance:
- The Federal Reserve (Fed) held interest rates steady at 5.25% to 5.5%
- The Yen reaches its weakest level in 34 years
- A ‘higher for longer’ rate environment can present both opportunities and challenges
The 3 major indices were down, ending months of a bullish streak:
| NASDAQ | DOW JONES | S&P 500 | |
| Month Open | 16,397.05 | 39,807.93 | 5,257.97 | Month Close | 15,657.82 | 37,815.92 | 5,035.69 | Monthly return | -4.51% | -5.00% | -4.23% |
In April, the previously buoyant market rally encountered a roadblock, as reflected by the S&P 500 Index retracting by 4.23% from its recent highs. This downturn coincided with a slew of data pointing towards stagnant progress in inflation metrics. Both the Consumer Price Index (CPI) Year-over-Year (YoY) and Core Personal Consumption Expenditures (PCE) YoY for March 2024 exceeded expectations, registering at 3.5% and 2.8% respectively.
These figures underpinned a notable shift in sentiment towards maintaining higher interest rates for an extended period, a sentiment echoed in the recent Fed policy meeting. During this meeting, the Fed opted to keep the benchmark policy rate within the 5.25%-5.50% range. Chairman Powell articulated that while rate hikes were improbable, the Fed remained prepared to exercise patience until inflation was effectively managed, leaving uncertainty lingering over potential rate adjustments for the remainder of the year1 . Notably, market sentiment currently forecasts approximately 1.5 rate cuts this year, a stark contrast to the six anticipated cuts at the start of the year2 .
Regarding the Fed’s balance sheet, they also announced plans to reduce the cap on treasury securities it allows to mature without replacement to US$25 billion from its current cap of up to US$60 billion per month. This adjustment aims to decelerate the rate of balance sheet reduction, potentially mitigating the risk of unintended market disruptions3.
Meanwhile in Japan, the Yen experienced significant depreciation, reaching its weakest level against the dollar in 34 years before staging a rapid rebound of over 2%. This volatile movement spurred speculation regarding potential intervention by the Bank of Japan. The depreciation of the Yen has been fuelled by evolving interest rate expectations in the US where diminishing prospects of rate cuts have strengthened the dollar. The resultant lower exchange rate poses challenges for consumers and companies, particularly with increased costs for imported energy, food, and other essential goods4.
A landscape of elevated interest rates can present both challenges and opportunities for companies across various sectors. For instance, heightened interest rates often translate to amplified borrowing expenses, potentially impacting companies burdened with substantial debt. Conversely, sectors such as banking might thrive in such conditions while industries like real estate and utilities could face adversity, given their reliance on borrowing5. Additionally, CEOs and executives of Starbucks, Amazon, and McDonald’s have noted a growing trend towards price sensitivity6 among US consumers.
Here are some Financial Sector ETFs and Stocks for consideration:
SPDR S&P 500 Bank ETF (NYSE-ARCA: KBE)
KBE is an ETF that aims to track the performance of the banking sector within the S&P Total Market Index. It includes sub-industries such as Asset Management & Custody Banks, Diversified Banks, Regional Banks, Diversified Financial Services, and Commercial & Residential Mortgage Finance. The top three holdings are Jackson Financial Inc (NYSE: JXN), First Citizen Bancshares Inc (NASDAQ: FCNCA) and Equitable Holdings Inc (NYSE: AXJ). KBE was launched on 8 November 2005 with an expense ratio of 0.35%. As of 31 March 2024, KBE’s 5-year performance is 4.67%.7
In April 2024, KBE opened at US$47.06 and dropped 5.82% to close at US$44.32.
Technical Analysis
Status: Neutral
Support: 42.00 – 43.00
Resistance: 47.00 – 47.50
Range-bound
SPDR Financial Sector ETF (NYSE-ARCA: XLF)
XLF is an ETF that aims to track the investment results of the financial sector of the S&P 500 Index. This ETF gives investors exposure to companies across various sub-sectors including financial services, insurance, banks, capital markets, mortgage real estate investment trust (REITs) and consumer finance. The top 3 holdings are Berkshire Hathaway Inc Class B (NYSE: BRK/B), JP Morgan Chase & Co (NYSE: JPM) and Visa Inc (NYSE: V). XLF was launched on 16 December 1998 with an expense ratio of 0.09%. XLF’s 5-year performance as of 31 March 2024 is 12.06%.8
In April 2024, XLF opened at US$ 42.16 and slid by 4.27% to close at US$40.36.
Technical Analysis
Status: Slightly bullish
Support: 39.40 – 39.70
Resistance: 41.20 – 41.70
XLF remains slightly bullish as long as the price can continue holding above the critical support level of 37.00. Currently, the price is on an uptrend, with minor rejections off the key supply level.
Here are some of the more popular US stocks – not ranked in any order – traded by POEMS customers in the month of April 2024.
Morgan Stanley (NYSE: MS)
In a significant financial stride, MS reported remarkable earnings for the first quarter of 2024, surpassing analysts’ expectations for both profit and revenue. The earnings per share (EPS) for MS stood at US$2.02, a notable increase compared to the anticipated US$1.66, while the revenue climbed to US$15.14 billion, surpassing the expected US$14.41 billion. This stellar performance underscored a 14% rise in profits from the previous year, totaling US$3.41 billion.
Ted Pick, Chief Executive Officer of MS, addressed concerns regarding regulatory investigations into the bank’s client screening processes, emphasising the institution’s ongoing commitment to enhancing client onboarding and monitoring procedures.
MS’s stellar performance in Q1 2024 reflects its resilience in navigating challenging market conditions. Like its industry peers, the bank benefited from robust trading and investment banking results, contributing to a positive market sentiment despite regulatory scrutiny.9
In April 2024, MS opened at US$94.16 and dropped 3.52% to close at US$90.84.
Technical Analysis
Status: Neutral
Support: 83.20 – 84.80
Resistance: 93.20 – 94.70
Range-bound
Goldman Sachs Group (NYSE: GS)
One of the leading global investment banks, GS showcased a robust performance in the first quarter of 2024, surpassing analysts’ expectations for both profit and revenue. The company’s stellar results were primarily fueled by a notable surge in trading and investment banking revenue, reflecting resilience and agility in navigating volatile market conditions.
According to the earnings report, GS reported earnings of US$11.58 per share, significantly outpacing the anticipated US$8.56 per share. Additionally, revenue for the quarter amounted to US$14.21 billion, exceeding analysts’ estimates of US$12.92 billion. This impressive financial performance underscored a remarkable 28% increase in profit, reaching US$4.13 billion compared to the previous year.
Despite facing challenges in the past year, GS’s CEO, David Solomon, expressed optimism about the bank’s performance and strategic direction. The results outpaced those of its big bank peers, positioning GS as a standout performer in the banking sector for the quarter. With a renewed focus on its core Wall Street activities and a pivot towards asset and wealth management, the bank is well-positioned for future growth.10
In April 2024, GS opened at US$416.68 and gained 2.40% to close at US$426.71.
Technical Analysis
Status: Neutral
Support: 387.50 – 394.00
Resistance: 450.00
Price is currently at an all-time high, and even though it is on a continued uptrend, price is approaching a psychological level of 450.00. Momentum seems to be slowing, more bullish momentum to come in after the price retest level of 415.00.
JP Morgan Chase & Co (NYSE: JPM)
JPM reported impressive earnings for the first quarter of 2024, surpassing Wall Street estimates. The bank’s earnings per share stood at US$4.44, beating the expected US$4.11, while revenue reached US$42.55 billion, exceeding the estimated US$41.85 billion.
Profit rose by 6% from the previous year, totaling US$13.42 billion, primarily boosted by the acquisition of First Republic Bank during the regional banking crisis. Despite a lower provision for credit losses, the bank’s trading revenue, particularly in fixed income and equities, surpassed expectations, contributing to its strong performance.
However, unchanged guidance for net interest income (NII) for 2024, despite expectations of an upward revision, led to a decline in the bank’s stock price by over 6%. Jamie Dimon, Chief Executive Officer of JPM remains confident in the bank’s performance but cautions about future uncertainties, including overseas conflicts and inflationary pressures.11
JPM’s resilient earnings underscore its ability to navigate challenging market conditions, positioning it for continued success in the future.
In April 2024, JPM opened at US$199.99 and dropped 4.30% to close at US$191.74.
Technical Analysis
Status: Slightly bullish
Support: 188.00 – 188.30
Resistance: 198.70 – 201.00
The outlook for JPM is slightly bullish, but its price will need to maintain above 178.00 to encourage further upside.
Citigroup Inc (NYSE: C)
Citigroup Inc posted impressive first-quarter revenue, surpassing analysts’ estimates, primarily driven by strong performance in investment banking and trading. However, the bank’s profit experienced a notable decline, down 27% from the previous year due to higher expenses and credit costs.
Earnings per share stood at US$1.86, surpassing the expected US$1.23. Revenue reached US$21.10 billion, exceeding the estimated US$20.4 billion. Investment banking revenue surged by 35% to US$903 million, driven by increased debt and equity issuance.
Jane Fraser, Citigroup Chief Executive Officer highlighted the completion of the corporate overhaul, aiming to simplify the bank’s management structure. She reiterated its medium-term targets for returns of at least 11% and generating at least US$80 billion in revenue this year.12
In the month of April, C opened at US$63.60 and dropped 3.57% to close at US$61.33.
Technical Analysis
Status: Neutral
Support: 56.50 – 57.90
Resistance: 63.00 – 64.00
Range bound
Bank of America (NYSE: BAC)
Bank of America reported strong first-quarter earnings, surpassing analysts’ estimates for both profit and revenue, primarily driven by better-than-expected interest income and investment banking performance. Despite these gains, the bank experienced an 18% decline in profit compared to the previous year. Earnings per share stood at US$0.83, exceeding the expected US$ 076, while revenue reached US$25.98 billion, surpassing the estimated US$25.46 billion.
Alastair Borthwick, BAC Chief Financial Officer indicated during a conference call with analysts that net interest income is expected to dip in the second quarter to around US$14 billion, primarily due to declines in wealth management and market interest income. However, he expressed optimism about potential growth in the second half of the year.13
Overall, BAC’s strong earnings performance in the first quarter underscores its resilience amidst challenging market conditions, positioning the bank for continued growth and profitability in the future.
In April 2024, BAC opened at US$37.94 and dropped 2.45% to close at US$37.01.
According to a report by Phillip Securities Research, dated 29 April 2024, the recommendation for BAC is “Accumulate.”
Technical Analysis
Status: Neutral
Support: 34.50 – 35.00
Resistance: 38.00 – 38.50
Range bound
CONCLUSION
In summary, following the remarkable market rally witnessed in recent months, it’s crucial to pause and reassess your investment strategies in light of the increased uncertainty surrounding the trajectory of interest rates. With inflation indicators surpassing expectations and the Fed signalling a willingness to maintain higher rates for a prolonged period, there’s a need to recalibrate your investment portfolio.
This entails carefully reviewing your asset allocation, considering potential shifts in market dynamics, and possibly diversifying your holdings to mitigate risks associated with interest rate fluctuations. By staying vigilant and proactive in adjusting your investments, you can better position yourself to navigate the evolving economic landscape and seize opportunities for long-term growth while managing potential downside risks.
Bloomberg analysts’ recommendations
The table below shows the consensus ratings and average ratings of all analysts updated on Bloomberg in the last 12 months. Consensus ratings have been computed by standardising analysts’ ratings from a scale of 1 (Strong Sell) to 5 (Strong Buy). The table also shows a number of analysts’ recommendations to buy, hold or sell the stocks, as well as their average target prices.
| Security | Consensus Rating | BUY | HOLD | SELL | 12 Mth Target Price (US$) |
| JP Morgan Chase & Co (NYSE: JPM) | 4.40 | 22 (73.3%) | 7 (23.3%) | 1 (3.3%) | 208.77 |
| Goldman Sachs Group (NYSE: GS) | 4.37 | 19 (70.4%) | 8 (29.6%) | 0 | 448.92 |
| Citigroup Inc (NYSE: C) | 4.23 | 16 (61.5%) | 10 (38.5%) | 0 | 66.73 |
| Bank of America (NYSE: BAC) | 3.82 | 13 (46.4%) | 14 (50.0%) | 1 (3.6%) | 39.65 |
| Morgan Stanley (NYSE: MS) | 3.77 | 10 (38.5%) | 16 (61.5%) | 0 | 100.00 |
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Reference:
- [1] “https://www.reuters.com/markets/rates-bonds/fed-hold-rates-steady-inflation-dims-hopes-policy-easing-2024-05-01/
- [2] “Bloomberg”
- [3] “https://www.reuters.com/markets/us/fed-announces-reduction-balance-sheet-runoff-pace-2024-05-01/”
- [4] “Carson, Ruth. “Yen Sparks Intervention Suspicion After U-Turn From 1990 Lows.” Yahoo Finance, 29 April 2024”
- [5] “https://www.forbes.com/sites/investor-hub/article/interest-rates-2024-which-sectors-will-benefit-rates-high/?sh=2e342404294e”
- [6] “https://www.businessinsider.com/amazon-starbucks-earnings-how-cautious-us-consumers-spending-sales-decline-2024-5”
- [7] “https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-sp-bank-etf-kbe”
- [8] “https://www.ssga.com/us/en/intermediary/etfs/funds/the-financial-select-sector-spdr-fund-xlf”
- [9] “Morgan Stanley (MS) earnings Q1 2024.” CNBC”
- [10] “Goldman Sachs (GS) earnings Q1 2024.” CNBC”
- [11] “Morgan Stanley (MS) earnings Q1 2024.” CNBC”
- [12] “Citigroup (C) earnings Q1 2024.” CNBC”
- [13] “Bank of America (BAC) earnings Q1 2024.” CNBC”
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