Monthly Market Update – April 2024

Key Points

• FEAR & GREED HITS 6-MONTH LOW One down month after five up months isn’t the end of the world, but it did spark some fear. Stock Market Fear & Greed Index drops to lowest level since November 1. The low in the Fear & Greed Index coincided with the first -5% pullback in the S&P in 2024.
  
• WHAT HAPPENS AFTER WIN STREAKS END SThe April losses not only ended a five-month winning streak for the S&P 500 but it ended a streak of 1%+ monthly gains as well. Historically, the S&P has been higher in the 1, 3, 6, and 12 months following the end of a 5-month winning streak and even better after a five-month or more winning streak of 1%+ gains than non-win streak periods.
  
• DOWN BUT DEFINITELY NOT OUT The preliminary reading of 1Q-2024 GDP was lower than expected at a +1.6% annualized rate. The primary driver of growth was consumer spending and business investment, but net imports were an abnormally large detractor. Imports grew at a blistering +7.2% rate, the fastest in two years, while exports were a tepid +0.9%.
• GLOBAL GROWTH IS RECOVERING Global growth in 2023 continued at an annual rate above 3%, remaining resilient in the face of tighter financial conditions, high interest rates, and heightened geopolitical tensions. And the OECD recently raised its 2024 global growth forecast to +3.1% from an earlier +2.9% projection, noting more optimistic outlooks for the U.S., China, and India. Its 2025 forecast is +3.2%.
• BUYBACKS: ANOTHER TAILWIND FOR EQUITIES The global supply of public equity is shrinking at its fastest pace in at least 25 years as companies keep buying back large amounts of their own stock but refrain from issuing new shares because of economic and geopolitical uncertainties. The basic law of supply and demand dictates that a declining supply will increase demand (and therefore price) all else equal.
• THE MOST IMPORTANT CHART FOR THE ELECTION? Like the Misery Index of the 1970s, which measured the distress of average Americans by adding the Inflation Rate and Unemployment Rate, Bespoke’s MORTGAS Index combines the Price of Gas and Mortgage Rates to proxy American distress. Although it’s off its 2023 high, it remains very elevated and may be a headwind for the current Administration as election season looms.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of April 30, 2024. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

It was a discernibly ugly month for investors of all stripes in April as concerns over stubbornly high inflation, rising interest rates, and geopolitical conflicts weighed on global assets. Virtually all major asset classes experienced losses, whether stocks or bonds, domestic or international. Emerging Markets was the lone exception to buck the trend, albeit with a modest +0.4% total return. For the S&P 500 Index, it was the worst month since September. The benchmark index dropped -4.2% for the month. The S&P actually experienced its first -5% pullback of 2024 during the month when it was -5.2% off its all-time high set on March 28. But thanks to a late month rally, it was able to claw back about a percent of that. Within the S&P 500, Utilities were the only positive sector with a +1.7% gain. The Real Estate sector was the worst sector, losing -8.5%. Information Technology was the next worst sector, dropping -5.4%. That weighed on the Nasdaq Composite Index, which is about 50% technology companies and was down -4.4% in April. But it was small cap stocks that continued to be the laggards, with the Russell 2000 Index falling -7.1% in April. It was the worst monthly return for the Russell since September 2022 and sent it into negative territory for the year-to-date period. Clients were notified late in the month that after being out of small caps tactically, we did replace our mid cap allocations with small- and mid-caps (SMID caps) in the final days of the month. With the risk of recession declining, interest rates peaking, and underperformance to large caps near historical high in terms of magnitude and duration, we added back quality small cap exposure. The stocks that got hit hardest in April were those that were most heavily shorted, stocks with low dividend yields, and stocks with low market caps (small caps), but wasn’t a big distinction between leaders and laggards – pretty much everything fell a similar amount regardless of stock characteristic. It’s hard to be too concerned about the April pullback, though; after all, the market was due for a break, as both the S&P and Nasdaq had been riding five-month winning streaks and are still up more than +20% in 2024 (even after the April declines).

Developed market international stocks were negative as well but fared better than their U.S. counterparts. The MSCI EAFE Index was down -2.6%, and their +1.5% outperformance over the S&P 500 was the largest for a month since January 2023. Like the S&P and Nasdaq, the EAFE Index, including both Japanese and European equities, had the first monthly decline since October. As mentioned above, the MSCI Emerging Markets Index was up +0.4%, its third straight positive month and fifth in the last six months. Those April gains came in spite of the U.S. dollar spot index gaining +1.7% for the month, its fourth consecutive month higher. Last month, we discussed how a strong U.S. dollar is a headwind for non-U.S. assets and makes the recent non-U.S. equity performance even more impressive.

Fixed income markets also struggled with the threat of re-emerging inflation and the change in rate expectations. In April alone, fed funds futures markets priced out one and a half rate cuts in the U.S. for 2024, and the timing of the first cut was pushed further back to November. U.S. Treasury yields surged, with the key 10-year U.S. Treasury yield jumping +48 basis points to close the month at 4.68%, the largest monthly yield increase since September 2022. The 2-year U.S. Treasury yield was up +42 basis points to 5.04%, its highest monthly close since October 2023. The headline Consumer Price Index (CPI) showed inflation rose to +3.5% year over year for March, from +3.2% in February. Core CPI increased at a +3.8% annual rate, unchanged from February. Core Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, also remained unchanged in March at 2.8%. With inflation continuing to reaccelerate, the futures market priced in only a single Fed rate cut for the year — a 25 basis point cut in November. As a result, U.S. bonds (the Bloomberg U.S. Aggregate Bond Index) and non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) both tumbled -2.5% for the month.  For the year, U.S. bonds are down -3.3%, and non-U.S. bonds have lost -5.7%.

Even with the broad-based losses in global stocks and bonds in April, the economic backdrop remains supportive for corporate earnings, and most major central banks are expected to deliver rate cuts as their next move, not rate hikes. In addition, the first quarter earnings season has largely seen companies match or beat expectations – although that is against a low bar set by Wall Street analysts that had been ratcheting down their forecasts. Sure, April highlighted that persistent inflation remains a key risk that has the potential to halt any rally in risk assets. But May began the Federal Reserve (Fed), leaving interest rates unchanged, as expected, but concluded with fairly dovish remarks by Fed Chairman Jerome Powell. Furthermore, on Friday, May 3rd, the April Employment Report was released, and job growth was much less than expected, and wage increases were also lower than expected. That helped reverse yields sharply lower, sending stocks and bonds higher, and already starting to repair some of the April declines.

Source: Bloomberg. Data as of April 30, 2024.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Quick Takes

FEAR & GREED INDEX HITS 6-MONTH LOW

One down month after five up months isn’t the end of the world, but it did spark some fear. On April 19, the CNN Business Fear & Greed Index dropped to its lowest level since November 1. The Fear & Greed Index is a way to gauge the emotion driving the stock market through the compilation of seven different indicators that measure aspects of stock market behavior. Not uncoincidentally, the S&P 500 Index also experienced its first -5% pullback of 2024 on April 19th, when it closed -5.2% off its all-time high set on March 28. In the five-month rally from November to March, the S&P 500 surged +25.3%, so it seems a bit of an overreaction for the Fear & Greed Index to drop from the high end of Greed to the low end of Fear from a mere -5.2% pullback. A typical calendar year will see three -5% pullbacks on average. But investors may have gotten complacent from the extended five-month rally with little downside volatility. It has been more than 300 trading days since the S&P last dropped more than -2% in one day. According to Strategas Research Partners, that stretch of “subdued volatility” is nearing levels that were last seen in 2017, when the broad index went more than 350 sessions without a decline of at least -2%. 

Fear & Greed Index hits Lowest Level Since Nov 1

Stock price components hit fearful levels

Source: CNN Business.

WHAT HAPPENS AFTER WINNING STREAKS END?

As previously mentioned, the April decline ended a five-month winning streak for the S&P 500. But Bespoke Investment Group notes that it actually ended a five-month streak of 1%+ monthly gains as well. The chart below shows the subsequent performance of the S&P 500 after prior five-month winning streaks from the end of the month that the winning streak came to an end (equivalent to the end of April this time around). Historically, the market has not faltered in the aftermath of the end to these winning streaks, and in fact, the returns have been stronger after 5+ month winning streaks end for the subsequent one-, three-, six- and twelve-month periods. What is also notable is that in the three and six months following the prior nine times that we had an end to a five- month streak of 1%+ monthly gains (with a decline in the sixth month), the S&P was higher every single time. 

S&P 500 Performance After 5+ Month Winning Streaks End

Median for 5+ month streaks, median after 1%+ gain streaks, and the Average for all periods

Source: Bespoke Investment Group.

DOWN BUT DEFINITELY NOT OUT

U.S. economic growth for the first quarter slowed considerably from the fourth quarter’s +3.4% annual pace. The advanced estimate for Q1 real Gross Domestic Product (GDP), the government’s main measure of economic activity in the U.S., was just +1.6%, far below consensus forecasts for a +2.5% reading. Personal Consumption Expenditure (PCE) growth was just +2.5%, weaker than the expected +3.0% and the prior quarter’s +3.3% annual rate. Consumer spending accounts for about 70% of the U.S. economy, so the slowdown is a concerning signal for future growth. Government Spending was up just +1.2% versus +4.6% the prior quarter. The government expenditures had been up considerably from the 10-year average of about +1.8%. Business Investment, which is the second largest component of GDP, grew at a rate of +2.9%, down from +3.7% the prior quarter. Many economists point out that Exports increased just +0.9%, down from +5.1% in the prior quarter, while Imports rose +7.2% versus +2.2% in the previous quarter. It was the fastest pace for imports in two years and an aberration that isn’t expected to persist. 

GDP Growth Slowed to a +1.6% Rate in Q1, Well Below Expectations

U.S. Real Gross Domestic Product (% change from previous quarter)

Note: Seasonally adjusted annual rate
Source: U.S. Bureau of Economic Analysis via FRED, CNBC.

GLOBAL GROWTH IS RECOVERING

Fears of a global recession have receded, and global growth is recovering, potentially supporting risk assets. The Organization for Economic Cooperation and Development (OECD) points out that global growth in 2023 continued at an annual rate above 3% despite tighter financial conditions from major central banks hiking their policy rates and heightened geopolitical turmoil. They point out that easing trade imbalances, near record low unemployment, and moderating inflation have helped global economic activity remain surprisingly resilient (a theme we highlighted in the March Monthly Market Update). They acknowledge considerable divergence across economies with softer outcomes in many advanced economies, especially in Europe, offset by strong growth in the U.S. and many emerging market economies. The OECD raised its 2024 global growth forecast to +3.1% from an earlier +2.9% projection, noting more optimistic outlooks for the U.S., China, and India. Its 2025 forecast is +3.2%.

The Global Growth Outlook has Improved

OECD Composite Leading Indicators (April 1994 – March 2024)

Source: OECD, MFS Investment Group.

BUYBACKS: ANOTHER TAILWIND FOR EQUITIES

The global supply of public equity is shrinking at its fastest pace in at least 25 years as companies keep buying back large amounts of their own stock but refrain from issuing new shares because of economic and geopolitical uncertainties. Data from JP Morgan shows the global universe of public equities has already shrunk by a net $120 billion so far this year, far exceeding the $40 billion taken out over all of 2023. That puts the net figure on course for a third consecutive year of decline — a trend not seen since the data began in 1999. JP Morgan’s data shows initial public offerings and other share sales have fallen short of forecasts. Equity offerings were expected to pick up this year as investors became more confident that the U.S. — home to the world’s largest equity market — would avoid a recession. Meanwhile, share buyback announcements have been robust during the first quarter earnings season, which is winding down. Just before going to press, Apple announced a massive $110 billion share buyback approval. That’s the biggest share buyback in history, beating its own prior record set in 2018 (Apple is responsible for the top six of the largest buybacks on record). With its share price in the range of about $185 that would mean 594 million shares being removed from trading. The basic law of supply and demand dictates that a declining supply will increase demand (and therefore price) all else equal.

Global Equity Supply Turns Most Negative Since 1999

Net share issuance by companies on MSCI All Country World Index

Note: Net share issuance adjusted for price and currency changes ($bn)
Source: JP Morgan, Financial Times.

THE MOST IMPORTANT CHART FOR THE ELECTION?

Back in August, we highlighted the Bespoke MORTGAS Index. It was a modern take on the Misery Index from the 1970s, which added together the U.S. Inflation rate and the U.S. unemployment rate to highlight economic distress by average Americans. Bespoke’s spin on measuring distress among Americans combines the 30-year average national fixed mortgage rate and the average national price for a gallon of gas. High mortgage rates and high gas prices are a pain point for the average U.S. consumer, and in 2023, the MORTGAS index hit a multi-decade high of 11.66. Although the index has backoff the all-time high, the two components remain very elevated and have the MORTGAS Index at 11.1. If this gauge of distress stays elevated and talk of stagflation continues, it will be a formidable headwind for the Biden Administration come election time.  

The Bespoke MORTGAS Index

Mortgage Rates + Gas Prices (Last 20 Years)

Source: Bespoke Investment Group.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.