Thoughts on the Market: April Edition
Written by Head of Research, Jamie Murray, CFA
Look to the Labour Market
Equity markets cooled in April, coincident with stubborn inflation readings caused by strength in the services side of the economy. This strength was evident in GDP and employment data, which have steadfastly increased despite interest rates sitting 200- 250 bps higher than pre-pandemic levels. This begs the question of whether central governments have done enough to quell inflation expectation or if inflation will re-accelerate.
We have examined the goods and commodities aspect of inflation in this letter previously, noting that low inventories will self-correct and ultimately cause prices to fall. However, a key inflation debate today centers on the labour side of the equation, as strong employment and high wage growth allow consumers to pay more for the same services and goods. This played out in 2023, when lagging wage growth outpaced inflation and certainly contributed to improved consumer sentiment (Figure 1).
Figure 1. Global Inflation Rates Since 2022
Source: University of Michigan
However, employers will only raise wages on aggregate when the supply of labour is low and the demand for wages is high. Let’s dive into some data behind wage growth, starting with changes in monthly employment in the United States. As can be seen in Figure 2, following large gains made as the economy re-opened, U.S. employment growth has settled into a range of 150-350k jobs per month. This is a healthy range and consistent with an expanding economy.
Figure 2. U.S. Non-Farm Payrolls through April 2024
Source: Refinitiv/MWG
The unemployment rate remains stubbornly low at 3.9%. While it has increased from 3.4% a year ago, it is considered a strong labour market and near full employment levels. Average earnings growth has cooled slightly but remains slightly elevated at 3.9% year over year. Thus, the labour market remains on the stronger side and is a primary reason why the Federal Reserve is hesitant to cut interest rates.
Beneath the government data dump provided every month are secondary indicators that are pointing to further deterioration in the jobs market. We believe this provides further evidence that the bias of central banks should remain towards the cutting of rates (as they have indicated) versus raising rates further.
The first of these secondary indicators is job openings. Firms determine their hiring needs based on projected business activity and the current productivity of their labour pools. As firms reduce hiring intentions, the first indication is a slowdown in job postings. Indeed’s Director of Economic Research compares new job postings on Indeed.com with government job openings data. Helpfully, the data sets track each other closely as seen in Figure 2. The downward trajectory of job postings indicates further cooling in the labour market.
Figure 3. U.S. Job Openings Continue to Decline from 2022 Peak
Source: Indeed
Another secondary indicator is the Evercore ISI Temporary Employment wage pressure survey. When this measure falls sharply, as it has since 2022, it indicates a weakening of the labour market. A combination of less demand and more supply of temporary workers reduces the price pressure for this type of worker.
Figure 4: Evercore ISI Temporary Employment Survey Continues to Weaken
Source: Evercore ISI
With goods, commodities, and now labour moderating, we believe it is prudent to continue to expect rate cuts in the future. While the recent bout of inflation has reduced expectations for lower rates in 2024, a check beneath the hood shows ongoing softening in pockets of the economy. We believe rate cuts will drive further gains in the equity market as cash comes off the sidelines and looks for higher returns.
GLOBAL EQUITY GROWTH FUND
The MWG Global Equity Growth Fund fell 2.5% in April, slightly more than the 2.1% decline in its benchmark. Year-to-date, the Fund has returned 13.6% versus the benchmark return of 8.2%. The Fund’s top three performers in the month were AstraZeneca (+14%), Alphabet (+9%) and Boston Scientific (+7%), while Adyen (-28%), Aon (-14%) and Uber (-12%) were the biggest detractors.
Portfolio Managers Summary
The portfolio took a breather, along with the market, with many of the weaker performers still up strongly year-to-date. As companies report earnings, we are seeing some weakness in names like Aon and Starbucks due to poor financial performance as well as names like Meta, where the business was strong, but investors nitpicked plans in areas such as capital investment. Outperformers from the perspective of earnings releases included Linamar, AstraZeneca, Alphabet and Boston Scientific.
We made no changes to portfolio companies in the month.
INCOME GROWTH FUND
The MWG Income Growth Fund fell 1.8% in April versus the 2.0% decline in its benchmark. The Fund is higher by 2.9% year-to-date versus the benchmark increase of 5.9%. Aegis Brands (+28%), NorthWest healthcare (+8%) and Rio Tinto (+8%) were the top performers, while Blackstone (-9%), Alaris Equity Partners (-9%) and Bank of Nova Scotia (-8%) were the top detractors. The fund yield was 6.2% at month end.
Portfolio Managers Summary
The Income Growth Fund held up better than the market, with its lower volatility offering some protection. Companies in this portfolio tend to report later than those in the Global Equity Growth Fund, although we have been encouraged by reports from Pfizer and IGM Financial.
We added a new investment in Flagship Communities REIT. Flagship owns Manufactured Housing Communities throughout the eastern United States. Manufactured housing is an affordable option for many low-income workers in smaller urban centers, and Flagship has done a good job improving the occupancy rates of its properties. Flagship is very acquisition driven and benefits from buying lots in need of minor capital investment that previous owners were unwilling to make. Typically, it improves the quality of life for its tenants and provides cost saving initiatives such as separate utility metering. The company has demonstrated an ability to increase cash flow quickly and we expect future acquisitions will continue to drive growth.
This Month’s Portfolio Update is written by our Head of Research, Jamie Murray, CFA.
The purpose is to provide insight into our portfolio construction and how our research shapes our investment decisions. As always, we welcome any feedback or questions you may have on these monthly commentaries.