What We're Seeing: Soft Landing Hopes – 22 April 2024

The Week in Brief

Markets bounced back after the early April wobble. The S&P 500 rebounded from previous losses and closed near new highs, helped by surprisingly strong first-quarter GDP data and upbeat corporate earnings. The soft landing narrative, which had come under some scrutiny, found fresh support.

Growth sectors led the advance. Technology and communication services outperformed, as investors rotated back into the names that had pulled back weeks earlier. Safe havens softened, with gold drifting lower as risk appetite returned.

The Economic Picture

The GDP print was the headline grabber. Consumer spending remained resilient, defying predictions of a slowdown. At the same time, inflation pressures appeared to ease, giving the Fed room to remain patient. This is the Goldilocks scenario that equity bulls have been hoping for: growth holds up while price pressures fade.

Bond yields ticked down from their recent highs, a relief for rate-sensitive parts of the market. Oil prices steadied after earlier spikes, and the Bloomberg Commodity Index finished modestly higher.

Our Read

We think the market is correctly interpreting the macro data. The US economy has proven more resilient than many expected, and corporations are navigating the higher-rate environment reasonably well. Earnings season, while mixed in places, has not delivered the kind of negative surprises that would derail the rally.

The key question is whether this resilience can persist. Consumer balance sheets remain healthy, but cracks are appearing in certain segments. Credit card delinquencies are ticking up, and lower-income households are showing signs of strain. These are not immediate red flags, but they bear watching.

For positioning, we continue to favour quality over speculation. Companies with pricing power, strong balance sheets, and durable demand drivers are better placed to weather whatever comes next. The rally in growth stocks is justified by fundamentals in many cases, but some of the more speculative corners of the market look stretched.

What Could Change Our View

The soft landing is not a certainty. If inflation data reverses course and starts rising again, the Fed will have little choice but to stay restrictive, and that would be a headwind for both stocks and bonds. We would also grow more cautious if consumer spending data weakens materially, as that would undermine the growth leg of the bull case. For now, the trend remains intact and we are positioned accordingly.

This is informational commentary, not investment advice.