May 1st, 2022
Investors can only hope that April showers will bring May flowers after enduring another exceedingly difficult week. The NASDAQ finished off its worst month since late 2008, and the S&P saw its worst monthly performance since March 2020. Bond funds offered little solace as rates rose significantly as the Federal Reserve and other central banks embarked on increasingly aggressive designs to tame inflation. The VIX surged back above 30 as the S&P tested below 4200 on several occasions. After a dip in the U.S. Treasury yields early in the week amid sharp risk-off trading, rates steadily rose into Friday. The U.S. Dollar Index notched a new 2 decade high after briefly surpassing 2020 and 2017 highs. WTI crude prices rose for the final 4 trading sessions to finish up around 9% on the week following a report Germany has dropped opposition to a full EU embargo of Russian oil. For the week, the S&P lost 3.3%, the DJIA was off 2.5%, the 50/50 Nasdaq/Russell benchmark tumbled 3.9%, Japan’s stock markets declined 1.1%, Chinese markets retreated 1.3%, and European bourses slipped 0.5%. Our BSD Global Tech Hedge Fund registered a 0.4% gain last week – Thanks to our short equity indice hedge. Coming into the week, Russian President Putin’s rhetoric that any country trying to intervene in Ukraine could be on the receiving end of a nuclear strike seemed to cast a general pall over risk appetite. China’s zero-Covid policies also continued to weigh on sentiment. Reports that manufacturing activity was slowly returning to Shanghai were offset by an opposing report that the government has no intention of backtracking from its zero tolerance policies. Economic data did little to provide much in the way of relief. April Richmond Fed data saw both the backlog and volume of new orders drop while wages continued to rise. The U.S. Q1 advanced GDP print was negative, but that softness was mostly attributed to trade, inventories, and government spending. EU inflation readings offered little hope that prices were likely to backtrack anytime soon. The U.S. March PCE data did offer some glimmers that could support the narrative that “inflation may have peaked”. Nevertheless, Friday also saw a record jump in the Q1 Employment Cost Index which may have helped push rates higher into week’s end. Inflation remained the key underlying theme across nearly all quarterly earnings reports which saw many firms report solid organic revenue growth, but struggle to hold the line on gross margins. In corporate news this week, Apple reported beats on its top and bottom line, alongside its annual share buyback and dividend increase announcements, but those results were sandbagged by executives noting that June quarter results will be negatively impacted by $4-8B due to supply constraints. Amazon missed expectations amid a massive writedown on its stake in EV maker Rivian and said it would no longer be ‘chasing physical or staffing capacity,’ and also offered lighter-than-expected revenue guidance for next quarter. Alphabet notched an EPS miss, though its revenue was inline, as its YouTube business saw some negative effects following its exit from Russia. Facebook Q2 revenue guidance came in short of expectations, but DAU numbers and tempering of expense growth expectations sparked a relief rally. Microsoft was a bright spot among the large cap tech firms reporting this week, announcing a further rise in its earnings and revenue amid continued demand in cloud services and software sectors. In M&A news, Twitter accepted Elon Musk’s $44B takeover offer after no white knight offers materialized, though there are already reports the deal will face close scrutiny from regulators and Congress.
This coming week, investors turn the calendar to May. Following earnings shockers from Netflix and Amazon, the week ahead features more tech heavyweights stepping into the earnings confessional (i.e. Expedia, AMD, Fortinet and Shopify) and a good dose of reporters from the energy sector (i.e. Marathon, ConocoPhilips and Enbridge). On the macroeconomic front, the two-day meeting of the policy-making committee of the Federal Reserve will be in the spotlight. The market has fully priced in a 50 basis points hike for May and at least another five to six 25-point hikes are expected before the end of year. The economic calendar also includes updates on construction spending, durable goods orders, trade balance, and the highly-anticipated U.S. jobs report. Analysts forecast a payroll gain of 390K for April and an unchanged unemployment rate of 3.60%. A slight downtick in hourly earnings growth to 5.4% is anticipated as well.
The Fund is 85% invested across a couple dozen tech vendors and tech end-users, with a 75% short equity indices hedge on the invested stock portfolio, which will incrementally grow (with a ‘laddered’ Nasdaq put option position) if the market deteriorates further.