Commentary:
Stocks post the second week of losses in response to a higher than expected US inflation. For the fourth consecutive release, US CPI came in above consensus forecasts, with March core CPI remaining unchanged from previous month at 3.8%. Consequently, markets are now pricing in one or two 25bps cuts in 2024, with June cut probability down to 21% from 51% in previous week. As a result, small cap US equities declined the most, with large cap growth stocks outperforming the rest of the market. Meanwhile, treasury yields have spiked across maturities, with 2-year and 10-year treasury yields up by roughly 60bps since the start of the year.
Investors anticipate higher stock market volatility, with VIX up by 25% YTD. Sticky US inflation, new geopolitical tensions in the Middle East, and upcoming elections in major economies create volatile environment for stocks. Therefore, investors are expected to benefit from diversifying their equity portfolios, both in terms of categories (i.e., sizes and styles) as well as geographies. Lastly, while the US small-caps and Emerging Markets equities are trading at attractive valuations, high fixed income yields may provide additional diversification benefits.
