Why Did Stocks Pull Back in April?
INVESTMENT COMMITTEE COMMENTARY April 2024
Stocks ended April lower as benchmark indices endured their first downturn in several months. Throughout April, investors had to factor in the Federal Reserve’s (Fed) apparent intent to hold interest rates at a two-decade high, the track of inflation, and geopolitical risks from the escalating wars in the Middle East and Ukraine. With April’s decline, the S&P 500 ends a streak of five straight monthly gains. Consumer confidence fell in April to its lowest level since 2022. While the labor market continued to support job growth, labor costs increased the most in a year, driven higher by wage pressures that are helping to push inflation higher.
Inflation data showed price pressures continued to rise in March, with the Consumer Price Index (CPI) rising 3.5% for the 12 months ended in March (3.2% for the year ended in February), while the Personal Consumption Expenditures Price Index increased 0.2% to 2.7% for the year ended in March. Consumer spending slowed more than expected, coming in at a 2.5% increase in the first quarter compared to 3.3% in the fourth quarter. Spending on services rose 4.0% in the first quarter, following a 3.4% increase in the previous period.
The S&P 500 fell 4.1% in April. Reflecting a modest change in investor sentiment, foreign developed and emerging markets equities outperformed U.S. stocks in April. Foreign developed stocks dropped by 2.8% while emerging market equities gained 1.6%. Interest rate sensitive U.S. REITs fell 7.9% as the yield on 10-year Treasuries hit its highest level since October.
Bond prices fell in April as the yield on 10-year Treasuries rose sharply from 4.20% to 4.69%. The Bloomberg U.S. Aggregate Bond Index declined 2.5% during the month. Other bond sub-indexes also fell in April and are lower for the year; however, high yield bonds are up modestly in 2024 at 0.5%.
Why Did Stocks Pull Back in April?
Coming into 2024, investors were optimistic in their views on economic growth, inflation, Fed rate cuts and corporate earnings, especially from Artificial Intelligence (AI) influences. April economic data was underwhelming, but not horrible. Importantly, inflation metrics were higher than expected. As a result, the Fed did not reduce interest rates as early as investors had hoped. Sticky inflation is not confirming “sustained and sustainable” progress toward the Fed’s 2% inflation target.
The following chart shows how quickly market expectations for interest rate cuts in 2024 have fallen. Such rate cuts would be expected to support a continued stock market rally. Instead, expectations for rate cuts moved from six cuts in 2024 to one or two cuts.
The markets are now digesting the “higher for longer” interest rate policy approach of the Fed. Economic growth remains solid and while there was some disappointment with first quarter GDP coming in at 1.6%, the economy still has positive momentum.
To summarize, the fundamentals for this market cycle (GDP growth, inflation, Fed rate cuts, and corporate earnings) remain fair, but the positive expectations that investors brought into 2024 have been muted, particularly by expectations on interest rate cuts.
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Market Segment (index representation) as follows: U.S. Large Cap (S&P Total Return); U.S. Mid-Cap (Russell Midcap Index Total Return); Foreign Developed (FTSE Developed Ex U.S. NR USD); Emerging Markets (FTSE Emerging NR USD); U.S. REITs (FTSE NAREIT Equity Total Return Index); Foreign REITs (FTSE EPRA/NAREIT Developed Real Estate Ex U.S. TR); U.S Bonds (Bloomberg US Aggregate Bond Index); U.S. TIPs (Bloomberg US Treasury Inflation-Linked Bond Index); Foreign Bond (USD Hedged) (Bloomberg Global Aggregate Ex US TR Hedged); Municipal Bonds (Bloomberg US Municipal Bond Index); High Yield Bonds (Bloomberg US Corporate High Yield Index).