Monthly economic and market review: May 2024

Four minutes is not a long time. Cookbooks tell us that boiling an egg for four minutes will leave you with a “runny yolk” and “lightly set white.” To achieve a truly hard-boiled egg, we are advised to keep the boiling going for a good 10 minutes. For decades, four minutes was also considered too little time for an athlete to run a mile (1.609km). That barrier was, however, broken by 25-year old Roger Bannister in May of 1954 at Oxford University. Starting with two pacers, Bannister set off at speed to achieve the seemingly impossible and claim a new world record for the mile of 3:59.4. New all-time records were also set in the markets this May when the S&P 500 and the NASDAQ closed above their previously set record levels. The JSE was also quick out of the blocks at the start of the month but just like Bannister’s pacers, the local index faded in the later running.

From a starting level of 76,076 points, the FTSE/JSE All Share index raced up to a close of 80,073 points on the 20^th of May to be just shy of the 27 Jan 2023 record closing level of 80,791 points. The atmosphere was a little too thin up there and the JSE benchmark index fell back quickly to a May closing level of 76,704 points and a monthly index gain of 0,8% (see blue line between the red bars in the graph below). After five months of the year, the index was left 0.2% lower in rand terms and down 3.3% in US dollar terms. In contrast, the S&P 500 took off from its end-April level of 5,254 points to touch a record closing level of 5,321 points on the 21^st of May. It then slipped back to close at 5,277 points for a monthly gain of 4.8% and year-to-date (“YTD”) gain of 10.6% (the green line in the one-year daily price graph below). The technology-heavy NASDAQ index (not shown) traded up from an end-April close of 15,658 points to a record closing level of 17,020 on the 28^th of May before closing the month out at 16,735 points (up 6.9% for May and 11.5% YTD).

Source: Factset

At home, the markets were obsessing about the looming elections and what an ANC without a parliamentary majority might mean for politics, the economy and ultimately, the markets themselves. Ahead of the 29 May election, the rand appreciated strongly to reach a best level of R18.05/$ on 21 May. That peak was very short-lived as the currency depreciated sharply back to R18.83/$ to be left virtually unchanged on the month. This was in an environment where the US dollar itself was weaker. Despite expectations of the European Central Bank (“ECB”) cutting interest rates in early June and the Fed standing pat on policy rates until later in the year, the US dollar (“USD”) lost ground against the euro, drifting to $1.09/€ from a starting level of $1.07/€. A weaker USD is usually positive for commodity prices as they are mostly all denominated in USD and therefore become cheaper in the currencies of other countries (with theoretically higher demand that puts upward pressure on prices). Commodity prices rose across the complex (see table below) with gold trading above $2,400/oz before paring its gains to close at $2,348/oz. Platinum traded above $1,000/oz and held that level while Palladium topped $1,000/oz but then lost significant ground to close at $899.20/oz (down $52/oz in May). Copper was largely unchanged, coal edged higher and iron ore extended its recent modest recovery.

The modestly higher commodity prices broadly supported the resources stocks in the first half of the month but the stock prices lost ground in the second half of May and the FTSE/JSE Resources index closed less than a percent higher when May was done and dusted. There was much discussion and speculation around BHP Group’s unsolicited bid for Anglo American but there was no meeting of minds on strategy and price between the two companies and BHP walked away from any deal at the end of the month. Despite some expectation that the Anglo American share price would collapse in the absence of the BHP interest, the share price held up fairly well and closed down just under 4% in May (and up 25% for the YTD). BHP closed 5.1% higher in the month, probably helped along by some relief that the company would not be going ahead with what would have been a very protracted process to acquire Anglo American.

More detail on Pick n Pay’s strategy, rights issue and Boxer listing helped the share find support in the month and the counter closed 23% higher at R25.80 per share. That is still a long way from the R60 per share that prevailed in early 2023 and the R80 per share highs reached in 2016 and 2018. Nevertheless, there is a growing belief that the turnaround strategy of recalled CEO Sean Summers will bear fruit, even if it does take a few years before earnings have recovered to a respectable level. A number of companies reported earnings during the month and Richemont (+12.7%), Afrimat (+9.4%) and Reinet (7.0%) were amongst the bigger gainers post results. Hong Kong-listed Tencent Holdings posted results in mid-May that put the skids on its two and a half month recovery. From a level of HK$268 in early March to HK$397 on 16 May, the share slid back to a May close of HK359 per share. Despite the pullback, market sentiment is more positive on the company and the potential value that it can still unlock. The Tencent recovery and the ongoing share buybacks at Naspers and Prosus have helped the two locally-listed companies to gains of around 20% this year (see the table below of the JSE gainers and losers in May and for the YTD).

During the course of May, the S&P 500 index gained 4.8% to completely reverse the 4.2% loss of April (the only negative monthly return from the S&P 500 this year). Sectors that outperformed the overall index in the month included Technology (+9.95%), Utilities (+8.46%), Communication Services (+6.56%) and Real Estate (+4.95%). Half of the 4.8% gain in the S&P 500 in May could be attributed to the robust performance of just four technology stocks: Nvidia (+26.8%), Apple (+12.9%), Microsoft (+6.8%) and Alphabet (+6.0%). Underperforming sectors included Energy (-0.97%), Consumer Discretionary (+0.18%), Industrials (+1.44%), Healthcare (+2.26%), Consumer Staples (+2.32%), Financials (+3.01%) and Materials (+3.07%). The table below highlights some of the bigger winners and losers from amongst the 100 largest companies in the S&P 500 in May and for the year-to-date. Semiconductor stocks remain the big winners this year (Nvidia +121.4%, Micron +46.5%, Quallcom+41.1%) although Intel (-38.6%) tops the biggest losers list YTD after sliding from $50 at the start of the year to just under $31 at the end of May. The company is busy with its own turnround strategy but has simply been left behind by its fast-paced competitors in an industry where a week is a long time.

The US first quarter earnings season was largely completed by the end of May with S&P 500 earnings up 6.0% y/y on revenue growth of 4.2%. The positive earnings growth supported the equity market and ongoing growth is likely to provide a tailwind to the market. For the remaining three quarters of the year, earnings growth of 9.3% y/y, 8.3% y/y and 17.6% y/y respectively is expected (Factset consensus). Those earnings are expected from revenue growth of 4.7% y/y, 4.9% y/y and 5.5% y/y respectively. For the 2024 calendar year, 11.4% earnings growth is forecast from revenue growth of 5.0%. The earnings growth story has legs into the 2025 calendar year where earnings are projected to grow by 14.2% from revenue growth of 5.9%. The numbers appear incredibly positive at an aggregate level but one must bear in mind the extremely impressive performance of a handful of companies. Nvidia’s non-GAAP diluted earnings per share were up 461% y/y in the first quarter which crudely accounts for almost one percentage point of the 6% y/y growth in S&P 500 earnings growth in quarter one. Nevertheless, the sustained earnings growth projected from the market along with expected lower interest rates from the world’s developed market central banks should continue to support equity markets. The ECB has telegraphed a first cut in its Refi rate at its June meeting with potentially further easing later in the year. Views on the timing of a first rate cut from the US Federal Reserve change from week to week but while the probability of a September rate cut has diminished substantially, there is still a chance of a first cut from the Federal Reserve in the last two months of this year.

After Bannister broke the four minute mile barrier in May 1954, a new record of 3:58 was recorded by Australian John Landy just one month later. The feat became more common place and the first mile under 3:50 was achieved in 1975. The current world record for the mile stands at 3:43.13 set by Hicham El Guerrouj from Morocco in July 1999. With an improving macroeconomic environment and ongoing earnings growth, there is opportunity for the markets themselves to go on to further new record highs in the shorter term.