April 2024 Monthly Market Commentary
- The S&P 500 fell 4% in April, while the Russell 2000 (Small/Mid-Cap) fell nearly 7%. Ten of the eleven S&P 500 sectors traded lower in April, led by Real Estate.
- Corporate investment-grade bonds declined over 3% as Treasury yields rose, while corporate high-yield bonds held up better with just over a 1.3% decline.
- International stocks outperformed US stocks but still declined. The MSCI EAFE (developed markets) declined 3.2%, while the MSCI Emerging Market Index was largely unchanged
Inflation and Rising Bond Yields Weigh on Stocks and Bonds
In April the S&P 500 traded lower for the first time in six months. The magnitude of the sell-off was relatively small at 4.0% (especially given the +10% performance for the year coming into April), but it ended the S&P 500’s 5-month rally. A rapid rise in Treasury yields contributed to the move lower in equities, with the 10 Year Treasury yield rising 0.48% to end April at 4.68%. The Russell 2000 Index, which is more sensitive to interest rate movements, traded lower by 6.8% as rising interest rates weighed on smaller companies. In the credit market, bond prices declined as Treasury yields rose.
The underlying theme for movements in the market remains the “expected” pace of rate cuts. Following recent commentary from the Fed, stick inflation, and a resilient economy the prospect of a first half 2024 interest rate cut is low (more below), which has been a headwind to further market upside.
An Update on This Year’s Biggest Market & Economic Trends
The S&P 500, despite trading lower in April, remains up nearly 6% this year. The driver of returns remains US large-cap companies like Nvidia, Amazon, and Google-parent Alphabet. These three companies continue to benefit from increasing investment in artificial intelligence, which is increasing demand for their data centers, cloud computing software, and semiconductors. In contrast, small cap stocks are trading lower this year due to their sensitivity to higher rates. This is because smaller companies rely more on short-term financing and floating-rate debt, which causes their interest rates to reset faster.
The sharp rise in Treasury yields is one of the biggest stories this year. At the start of 2024, investors expected the Federal Reserve to start cutting interest rates in March. It’s now mid-May, and March passed without an interest rate cut. What is preventing the Fed from lowering rates? Inflation and employment data. Inflation progress is slowing, and unemployment is still below 4%. The low unemployment rate allows the Fed to focus more on reducing inflation. As a result, investors expect only one rate cut in 2024, down from six at the start of the year. Furthermore, following recent economic data the first cut is not expected until Q4.
The question is what’s driving sticky inflation? Rising commodity prices are one reason that inflation remains sticky. Oil prices have risen over 14% this year, leading to a 23% increase in gasoline prices. Copper, which is a barometer of economic activity due to its wide array of end uses, has gained 18%. Higher commodity prices suggest solid underlying demand and further validates recent economic data that US economy is strong and adjusting to higher rates. Further evidence can be found in new home sales (which reached a 6 month high in 1Q) and consumers spending which remains robust (despite higher rates). Net-net, the resilience of the US economy to higher rates provides further support to the view that there is no immediate need for the Fed to rush to cut rates.
ENDNOTES
Disclosures
This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
