Global equity indices saw declines for the third month in a row. The S&P 500 declined 2.2% in October, sending the index down 8.8% over the last 3 months.

The S&P 500 is currently 9.5% below its record close in July, the 10-year treasury yield is 300bps higher, while earnings are expected to be 4 percentage points better than when the index peaked. What is clear is earnings are not the problem, any rally into the yearend is going to be rate driven.

Talking about earnings, October also saw the majority of US companies report third quarter earnings. 82% of S&P 500 companies beat earnings expectations which is above the 5-year average of 77%. In aggregate, earnings exceeded estimates by 7.1%; between the 5-year average of 8.5% and the 10-year average of 6.6%. Third quarter earnings growth is coming in at 3.7% year-over-year; representing the first quarter of year-over-year earnings growth since Q3 2022.

Looking at what we can expect in 2024, expectations have been moving up with analysts forecasting 5.5% revenue growth and 11.9% earnings growth, vs the 2.4% and 0.6% achieved in 2023, respectively.

The general takeaway from this quarter’s earnings season, is that US companies continue to execute very well given the current interest rate hiking cycle.

On the local front, domestic bonds and the JSE continue to be dictated by what is happening across the Atlantic in the U.S. The Rand remained under pressure as higher yields in the U.S. attracted assets away from domestic shores. Economic data remains soft suggesting high interest rates and inflation are beginning to weigh on the SA consumer. Additionally, Chinese growth and the general global slowdown, are hurting the SA diversified miners and PGM producers. This is putting pressure on stock prices while at the same time hitting the fiscus’ coffers and reducing support for the rand.

In this month’s Wood for the Trees, we take an in-depth look at the earnings across the companies held in our offshore portfolio. Generally, earnings were better than feared, with management teams successfully managing costs and driving margin expansion.  

The SA property sector remains attractive on many fronts. We take a look at the price performance of the listed property sector, which appears detached from current operating fundamentals. High interest rates are putting pressure on the sector which is being priced in at current levels. SA listed property could deliver serious upside when the interest rate cycle changes direction.

I hope you find this month’s edition informative.

Local section

• By the Numbers
• SA Listed Property: The Catalyst is on the Horizon

Global equity markets fell further this month, as U.S. treasury yields rose sharply and conflict in the Middle East added to investor skittishness. S&P 500 (-2.1%, +8.8% YTD), Nasdaq (-2.1%, +30.5% YTD), Stoxx Europe (-3.8%, +0.8% YTD), FTSE 100 (-3.8%, -1.7% YTD), Emerging Markets (-3.1%, -4.3% YTD), and Hang Seng (-2.1%, -12.6% YTD). The price of oil and gold rose as investors took a risk-off approach.

Third quarter earnings were front and center this month. Some of the big losers were Align Technology (-40.3%), who dropped after the medical device maker’s Q3 profit missed estimates and they cut their full-year sales guidance. Shares of solar firms, SolarEdge Technologies (-43.2%) and Enphase Energy (-34.6%) also dropped, after weaker-than-expected guidance, high inventories and slow installations cast a shadow over the solar sector. Some individual companies could ignore the broader gloom, including Microsoft (+6.4%), with revenue from its cloud division showing signs of acceleration, and Netflix (+8.3%) after beating earnings estimates, strong subscriber growth and price hikes.

U.S. economic data continued to defy expectations of a slowdown, with stronger-than-expected GDP growth and consumer spending. In the UK and Eurozone, sticky inflation and elevated wage growth make the prospect of “higher for longer” rates look increasingly likely.

Some of the European movers this month include Polish banks who rallied after the election on a more favourable policy shift. Bank Polska (+30.1%), Santander Bank Polska (+28.7%), Powszechna (+26.7%). On the other end, payments company, Worldline (-55.2%) fell after cutting its full-year targets as the economic slowdown hurt its business.

In China there were positive surprises in GDP and retail sales, however, sentiment remained dampened. Sportswear stock Li Ning (-25.1%), dropped after a weak Q3 as same-store and ecommerce sales declined. Baidu (-20.3%) also fell after analysts cut estimates on potential impact on ad and cloud revenue, after their AI model Ernie failed to impress analysts. Pharmaceutical companies Hansoh (+39.1%) jumped after entering a license agreement with GSK to develop and commercialize a drug in China, and CSPC (+20.0%) jumped after receiving approval on a vaccine.

Nike: Sentiment is Changing

Nike is one of our latest additions to the portfolio and we are very pleased with their quarterly results and guidance. We weren’t the only ones, as shares jumped 8% on the back of revenue growth (2%) and earnings that surpassed expectations; leading to analysts upgrading estimates.

Leading up to earnings, investors were focused on sluggish U.S. consumer spending, inventory issues, and a slowdown in China. While current conditions continue to put pressure on the retail space, U.S. retail sales have been defying expectations of a slowdown; growing stronger than expected at 3.75% year-over-year.

Inventory issues appear to be behind them with management noting on the analyst call, “both Nike inventory and our total marketplace inventory are healthy.” With inventory units down double-digits, they can “capture higher full price sales across [their] entire store fleet.” This drives higher profitability and margin expansion going forward.

Sales in China may remain soft, but sales are holding up (+12%) and management feel positive about the outlook. They noted that there is incredible energy around the return of sport in China, and it gives them “great confidence about the future and the Chinese consumer regardless of the macroeconomic outlook there.”

This is a world class company with earnings growth returning to the high teens and margin expansion from increased Direct-To-Consumer penetration. Management expects to leverage its digital and physical channels to provide a consistent and seamless experience for users. As digital penetration continues to expand, we expect Nike’s topline and operating margins to grow.

Microsoft: Leading the AI Race

Microsoft recorded a strong beat on top- and bottom line, with their Cloud business (Azure) coming in well above expectations.

Total revenues were up 8%, driven by an acceleration in Azure (+28%) on better-than-expected AI contribution. AI is a hot topic at the moment and Microsoft is “rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for [their] customers.” The CEO elaborated further on the analyst call, that “higher-than-expected AI consumption contributed to revenue growth in Azure.”

Microsoft has been leading the AI hype, but the ramp up in revenue will not be as quick as everyone thinks. Software experts expect revenue impact to be overestimated in the short term and underestimated in the long term. It will not be like a light switch, it will take time as it develops and improves.

Another positive was operating margins that reached their highest level to date, with gross margins of 47.6% and easily beating estimates. Management noted on the call that operating margins will remain flat next quarter, primarily due to the acquisition of Activision Blizzard – closed Oct 13, 2023 – in addition to AI investments.

As the largest investor in the ChatGPT parent company, OpenAI, Microsoft is leading the industry in AI enabled software. The AI wave continues to build with incredible demand and pricing power leverage, with Microsoft taking a leadership position in AI offerings.

Alphabet: AI Treasure Chest

Alphabet sales and profit topped analysts’ estimates and reported very strong results, nevertheless, the stock sold off as its Cloud business missed expectations. Total revenues were up 11%, as Search (+11.3%) and YouTube (+12.5%) advertising continued to accelerate, and more than offset slower Cloud growth of 22%.

On their analyst call, management noted that Cloud growth reflected customer optimization efforts, where customers are starting to optimize spend on cloud computing. Wall Street may have also embedded too much benefit from AI in their numbers. As mentioned in the Microsoft blurb above, while interest in AI is high, revenues recognized in the near term may be overestimated. We expect better AI impact in 2024 and beyond.

With that in mind, increasing capex indicates management’s visibility on future revenue streams. Alphabet expects to continue to invest meaningfully in the tech infrastructure needed to support AI opportunities.

Alphabet and its search engine, Google, have a treasure chest of data that is needed for AI and machine learning. Additionally, advertisers continue to prefer large, scaled platforms like Google, where AI and machine learning are providing superior return on advertising spend. Alphabet’s core businesses continue to perform well with plenty of room to monetize AI across its global customer base.

Apple: iPhone Challenges in Chinese Market Share

Apple’s results beat analysts’ expectations for sales and earnings with higher revenue from iPhones (+2.7%) and Services (+16.3%). While revenue was lower in the other segments; Mac (-33.8%), iPads (-10.2%), and Wearables, Home and Accessories (-3.4%). While overall sales were down 0.7%, both income and EPS were up double digits. Apple continues to be a massive generator of Free Cash Flow, reaching $110bn in cash flow from operating activities.

All eyes were on iPhone sales in China after data has shown that Apple is losing market share to Huawei, as they ramp up capacity. The company is struggling with sluggish demand and a shaky market in China, with revenue falling 2.5%. This led to a negative market reaction. However, the CEO Tim Cook didn’t seem too concerned, stating on the analyst call that “iPhone actually set a September quarter record in Mainland China.” Additionally, he had just returned from a trip to China “and could not be more excited about the interactions [he] had with customers and employees and others.”

Looking at the next quarter, Apple sees iPhone and Mac revenue growing, but sees significant decline in iPads and smartwatches as they lap tough comps from the year before. Apple continues to be supply constrained on the iPhone 15 Pro and Pro Max but expects supply-demand balance during the next quarter. Apple also expects Mac sales to show strong growth into December; driven by the launch of the new Mac models (M3, M3 Pro).

Apple remains a great company and has had a great run. This led us to take some profits off the top and rebalance our Apple holding leading up to earnings.

TSMC: Investing for the Future

TSMC’s results were better than feared; beating analyst estimated both top- and bottom line. Revenue was down 10.8%, gross margin was higher at 54.3%, and capex came in stronger than expected. Guidance also surprised on the upside, as they continue to see robust demand for their high-end chips and expect strong multi-year growth.

Consensus leading up to earnings was that demand was weak and volume production for their next advanced technology would be delayed. Encouragingly, TSMC eased concerns and highlighted both strong demand and that they remain on track with production.

Another focal point has been around the inventory glut in the PC and smartphone market. Management noted on the analyst call, that they “are observing some early signs of demand stabilization in the PC and smartphone end markets.” They feel we are very close to the bottom, with inventory control being healthier than they thought.

We are confident about the structural importance of semiconductors in the rapidly digitizing global economy and the exploding need for semiconductor chips given AI and big data. Analysts estimate chip demand will increase 10-fold over the next decade. And as the producer of these semiconductor chips, TSMC’s products and infrastructure is likely to play a key role for customers across multiple industries.

Blackstone: A Pause in Activity

Blackstone’s Q3 results weren’t well received with the stock falling nearly 8% on the day. The market reacted to slower inflows, deployment, and realizations. This lower level of capital deployment and realizations slowed down the normal cadence of management fee growth, cascading into new fund fees also being delayed. A silver lining was Assets Under Management (AUM) that continued to grow and reached $1.01trillon – more than double the size of South Africa’s GDP.

Against a challenging backdrop of higher rates, economic uncertainty and geopolitical turbulence, management has chosen to sell fewer assets. With investments not performing as well as expected, it has led to slower realizations, particularly in the real estate market. However, as the COO noted on the analyst call, “The majority of the equity portfolio is in logistics, data centers and student housing, which continue to benefit from robust fundamentals.”

Blackstone is deploying cash at a slower pace and keeping more dry powder (approximately $200bn), which means that they have less money employed in the system. This quarter saw the second lowest quarterly deployment pace since the onset of the pandemic. Market uncertainty continues to weigh on overall industry activity levels.

While the macroeconomic backdrop remains uncertain, we believe Blackstone’s substantial dry powder and global product offering positions them well to capitalize. As the CEO confidently noted in the analyst call, “We have led the industry’s evolution, and I expect we will continue to lead it in the future.”

Goldman Sachs: Showing Momentum

Goldman Sachs reported a drop in revenue (-1%) and EPS (-34%) as it grappled with losses following write-downs and its pullback in retail banking. Excluding these special items, EPS was down 4.5%. However, encouragingly, Investment Banking is showing increased momentum and reported an increase of 1%. This is the first increase in almost 2 years; a sign that the dealmaking drought may be coming to an end.

The CEO eloquently said on the analyst call, “If conditions remain conducive, I expect the continued recovery for both capital markets and strategic activity. As a leader in M&A advisory and equity underwriting, a resurgence in activity would be a tailwind for Goldman Sachs.”

Goldman Sachs remains focused on executing their strategy and has been meeting or surpassing their milestones. We feel positive as capital markets activity ramps up and their strategy gains traction. Supporting this the CEO proclaimed, “I’ve never felt more optimistic about the firm, and our strategy has never been more clear.”

ING Bank: Share Buyback Machine

ING’s Q3 results were positive, with the start of a €2.5bn buyback program and a net profit above expectations. Net profit (+103%) was driven by strong income in Retail and Wholesale Banking as well as lower provisions, while Net Interest Income (NII) (+20.8%) missed expectations. Positively, loan-loss provisions were 43% lower than expected and benefitted net profit, due to a better loan book profile and the successful de-risking from Russia.

Now that the European Central Bank is pausing rate hikes, net interest margins may come under pressure as funding costs on deposits increase and catch up to lending margins received on loans. Deposits are also slowing as people are moving their money from their bank account to money market funds that offer higher returns. Further pressuring banks net interest margins.

Looking at excess capital, CET1 (Common Equity Tier 1) ratio increased to 15.2% – well above their target of 12.5%. This shows the bank’s financial strength and excess capital that is well above what is required by European regulation. ING Bank is one of the best capital return stories in the industry, with an expected €24bn to be distributed between 2023-2025. This equates to more than 50% of their market cap.

We continue to expect large capital returns from ING in the form of dividends and share buybacks as they look to distribute excess capital.

HSBC: Committed to Capital Distribution

HSBC’s Q3 results showed solid capital strength with an impressive CET1 ratio of 14.9%, that enabled a higher-than-expected $3bn share buyback program.

Revenues were up 40%, driven by NII (+16%) due to higher interest rates, while non-NII (+93%) was driven higher by non-recurring items. The bank achieved an impressive pre-tax profit increase of over 140%; narrowly missing estimates. Guidance was maintained, while operating costs were revised higher on the back of higher tech expenditure, and a potential increase in performance-related pay. Acquisition-related costs for Silicon Valley Bank UK remain unchanged.

The gain on the sale of the Canadian business – expected to close in 1H24 – has also been updated to $5.5bn (previously $5.3bn) and will result in a special dividend of $0.21. Management remains committed to future capital distribution.

Turning to Asia. Management said on the analyst call that they don’t expect further negative correction in China, as we are at the bottom of that correction phase with a gradual rebuild moving forward. We believe investor interest in emerging markets will improve as sentiment improves and Chinese economic growth stabilizes.

HSBC remains a stellar pick with its global presence, strong earnings track record, generous returns to shareholders, and relatively low valuation.

Visa: Robust Consumer Spend

Visa reported a beat on revenue (+11) and EPS (+22%), as spending remained strong and volumes growth stable. Cross-border volumes surged (+16%) on steady travel demand, with U.S. inbound travel recovery accelerating in the quarter and travel into Asia continuing to improve.

Revenue growth guidance of low-double-digits surprised to the upside (previously high-single-digits). Encouraging, the CFO said on the analyst call, that they “are assuming no recession in [their] outlook.” They also gave a reassuring view on the consumer, stating that spend has remained stable and their “data did not indicate any behavior change across consumer segments.”

Strong U.S. economic data continues to defy expectations of a slowdown, fueled by robust consumer spending. Visa has ongoing pricing power, and a long runway to expand value-added services to its large and global existing customer base.

Unilever: Pricing Power & Margin Expansion

Unilever’s trading update showed underlying sales growth of 5.2%, with pricing up 5.8% and volumes down slightly by 0.6% – showcasing the company’s ability to push pricing with only a marginal drop in volume.

Management noted that consumer sentiment remains strong overall, although they are seeing signs of more cautious behaviour, with consumers trending towards larger pack sizes as they seek value for money.

In their full-year report, we expect improvements in operating margins as input costs have fallen and pricing remains unchanged. This margin expansion theme is a significant reason why we are so positive on Unilever’s trajectory. As a consumer-staples stock, it also provides more stable and resilient earnings during uncertain times.

Shell: Gaining Resources & Renewables

Shell delivered Q3 numbers that were in line with expectations and was well received by the market; closing up 4.2% on the day. Price realisations were lower than expected, but the company had good production levels with volumes generally above guidance.

Management increased their share buyback program to $3.5bn over the next 3 months, ahead of expectations and exceeding the target set at Capital Markets Day. The CFO noted on the analyst call, that they “continue to preferentially allocate capital to share buybacks as [they] believe shares are undervalued”.

They are also committed to a balanced energy transition strategy, that is most accretive for shareholders. “It’s a strategy that continues to deeply believe in the role of gas… continues to see an important tool for oil. And it’s a strategy that’s looking at leveraging our marketing and our trading capabilities to be able to drive the decarbonization journey.”

We remain bullish on the price of oil on a fundamental basis and have high conviction in resource scarcity names such as Shell. A unique combination of supply constraints and years of underinvestment has resulted in favourable multi-year outlook. Shell continues to build its reputation as a disciplined capital leader in the sector with a tight control on capex and competitive shareholder distributions.

In line with global markets, the JSE ALSI recorded negative performance for a third consecutive month, declining 3.8% in October (-4.7% YTD).  It was red across the board, with Industrials (-4.7%) leading, followed by Retailers (-4.6%), Property (-4.4%), Resources (-3.3%) and then Financials (-3.1%).

The worst performing share in the industrials sector was MTN (-20.1%), as investor concerns about the impact of a depreciating Naira on MTN Nigeria weighed on the stock. Further weakness in the sector came from Raubex (-14.0%), PPC (-11.4%) and Grindrod (-9.3%). On the other hand, Textainer rallied 28.5% following an announcement that the company will be bought out by Stonepeak (an alternative investment firm) for US$7.4bn ( R141bn). Karooo (+14.8%) and Tiger Brands (+13.1%) also recorded decent gains for the month.

The retail sector was weighed down by PIK (-31.5%) which was also the worst performing share on the JSE following the release of interim results on 15 October. The company reported a loss resulting in them not declaring a dividend. Further, management noted they expect continued pressure in the core Pick n Pay stores, which will keep margins under pressure. Pepkor and Mr Price were also down 4.0% and 3.0%, respectively, while Italtile recorded a decent gain of 5.5% for the month.

While Emira was up 4.3% for the month, most of the property stocks remained under pressure with some trading ex-dividend: Hyprop (-11.9%), Growthpoint (-9.1%), Equites (-8.4%), SA Corporation (-8.2%) and Sirius (-7.6%).

Resources, which are the worst performing sector YTD (-20.9%), were a mixed bag.  Gold and energy stocks rallied in October (Goldfields +20.3%, Harmony Gold +15.2%, AngloGold +10.1%, Exxaro +9.8%) while the PGM counters recorded further losses (Implats -23.1%, Sibanye -19.8%, Anglo -11.4%) given continued weakness in the PGM basket price. Further contributing the performance of Sibanye were comments from the CEO stating that the company may be forced to close unprofitable mines as PGM prices continue to drop.

Although Transaction Capital remains the worst performing share year to date (-85.4%), the share recorded the best performance in the financial sector, up 13.1%. PSG gained 11.2%, following the release of their interim results on 11 October. On the flipside, Discovery (-10.7%), ARC (-9.9%), Ninety One (-9.1%) and Quilter (-7.1%) were down for the month.

SA Listed Property has been the biggest underperforming sector on the JSE for several years. While we have improved since COVID lows, over a 5-year period the sector remains 44% lower and over an even longer period the picture gets worse. This underperformance has understandably frustrated and concerned investors.

Fundamentally the sector has seen much improvement since the lows of 2020 but understanding the environment and factors influencing the sector plays a significant role in understanding the market’s movement.

Where 10yr Yields Go, SA REIT Yields will Follow

One of the driving forces behind the weakness in listed property is SA Bond yields. In an environment where bonds offer a similar yield to the likes of a listed property stock, bonds are favoured. Bonds present a less risky offering and if they provide a similar yield to property, property comes off second best. The graph below illustrates this, showing how the SA REIT Yield closely tracks the 10-year Government Bond Yield. Unfortunately, a climbing yield on property stocks pressures the share price so it is unsurprising listed property has fallen as much as it has when the graph below is considered.

Interest Rates Weighing Down Improving Earnings Growth

A second factor to consider is that a rising interest rate cycle is not supportive of the property sector in any way or form. Although we have seen the sector on a debt reduction drive since COVID, the property ownership and management industry fundamentally has higher gearing levels relative to other industries. Debt is an integral part but with debt comes interest expense and since the low of 3.5% in 2021, South African interest rates have increased 4.75 percentage points to the current level of 8.25% over a very short period of time.

Interest expense has increased on the back of this and while revenue growth has consistently improved, the growth in interest expense has surpassed that of revenue growth which in turn puts pressure on earnings/distributions. This is evident in the chart below which shows the growth in property revenues versus the growth in interest expense for Growthpoint, Redefine, SA Corp, Vukile and Octodec over the past five years. The percentage growth in interest expense relative to the growth in revenue is far greater over the past year. 

Under the “higher-for-longer narrative” interest rates are anticipated to remain at current levels (with the potential for one last 25bps increase) for the coming months with the decreasing interest rate cycle expected to begin in the second half of FY24 for the US with South Africa following suit. However, while rates will remain high, they will not experience a jump equating to a 30% increase in interest expense as seen over the past 12 months; making it easier for revenue growth to stomach the expense.

The increased interest expense over the short term has already been flagged by the sector and has to a degree played a role in the weakness seen over the past few months. The important point is this is not news to the market and share prices already have this baked into earnings expectations. As such, any news around lower interest rates sooner rather than later will be a catalyst for the sector.

Tailwinds for Net Property Income (NPI)

Revenues are anticipated to grow on the back of reduced vacancy rates and higher rental reversions. On a sector level, the property companies have indicated continued strong performance from industrial assets, increased demand for retail space primarily from the big retailers and even reduced vacancies in the office sector with an improvement in the rate of negative rental reversions. On the top line, results continue to improve. NPI includes the costs associated with operating the properties including the costs associated with loadshedding. Understandably NPI has felt the increased drag of increased diesel costs over the course of this year in particular. 2024 is already forecast to experience significantly lower levels of loadshedding which will provide an immediate benefit to NPI.

NAVs at Loggerheads with Sectoral Discounts

The share price discount to net asset value (NAV) has remained significant for a number of years. In each update we have provided, the sector discount has remained stubbornly between 40-60% versus underlying property values. An argument often used to discredit this theory is simple, underlying NAVs are too high. However, as highlighted in the past, property sales continue to take place at or above NAV confirming the accuracy of the NAVs provided. Over the past three years, the aggregate value of disposals across the ten largest SA REITS was R38bn. These sales were on average 0.2% above book value, were concluded under the current challenging market conditions and confirm the accuracy of the NAVs provided across the sector.

Historically the sector has shifted from premium/discount territory depending on the underlying operating environment. Just before the pandemic occurred, SA REITs traded around 17% lower than underlying NAVs which presents a considerable price upside from current levels if conditions begin to normalise.

It is important to understand that a large discount to NAV does not drive price recovery. In other words, investors will not choose to invest in the sector just because this discount exists. However, importantly it shows just how undervalued the sector remains relative to historic levels. A discount as severe as this will not persist indefinitely and the market is very much aware of the upside potential that exists.

Attractive Distribution Yields Remain

The increased interest expense forecast for FY24 has had some companies forecasting a decrease in distributable income per share, others planning to keep things stable with some indicating expectations for low single digit increases in DIPS and on the back of this dividend payouts. On current pricing, dividend yields remain attractive in the low double digits.

SA REIT Yields were last at this level in 2003. At that time, the market was at the peak of an increasing interest rate cycle which was followed by a decreasing rate cycle before climbing again during the financial crisis. The yield in the graph below tracked these cycles. While we do not know exactly when interest rates will begin to decline, we have arguable reached the peak of the hiking cycle. When rates begin their downward cycle, it’s fair to assume yields will track rates lower and with lower yields comes capital appreciation.

Fundamentals Remain Strong

Fundamentally the listed property environment continues to see improving metrics. Loan-to-values continue to decline, escalations remain between 5-7%, net asset values are market related yet severely discounted by the market, vacancies continue to decline and rental reversions are starting to show strength on the side of the property owner. Lower levels of loadshedding are anticipated to reduce operating expenses which will offer some reprieve. The higher for longer interest rate environment is anticipated to put strain on distributable earnings but this should start to abate from the second half of next year. Getting down into the nuts and bolts of the sector, fundamentally listed property remains strong.

The sector has been out of favour for some time but with interest rates forecast to begin their downward trend towards the end of next year, the catalyst for listed property is not far off. Given the attractive yield currently on offer, we caution those invested to sit tight, take the double-digit dividend yield and wait for the cycle to turn.

As I sit here writing this note, markets have ripped higher in the first week in November with the S&P 500 up 4.2% and the JSE up 2.6%, with the latest FOMC meeting suggesting rate hikes are done. Yields pulled back causing global equities to rally. As mentioned in the beginning of this letter, earnings continue to move higher, any short-term rally in equities is totally dependent on rates moving lower. 

A chart that we pay a lot of attention to, is what the forward rate market is pricing in for the next 12 months in terms of rate cuts. Forward rates are currently pricing in four 25bps cuts in 2024 with the first cut expected to come in May.

So, for the time being bad news is good news as investors ramp up the potential for earlier rate cuts in 2024. One thing is for certain, with these sharp moves you must be invested to benefit.