Market Pulse – April 2024

April marked the first decline in the market since October 2023, ending a long five-month streak.  The S&P shed 4.2%, the DOW declining 5% and the NASDAQ 100 (QQQ) slumping around 5.2%, The month’s closing was well off the intra-month lows on April 19th where the S&P was down over 5% and QQQ was down close to 7%.    Bonds lost 2.5% for the month as rates backed up. The rest of the developed world (CWI) held up better with declines around 2.5%.

TWG Portfolios underperformed their respective index as a result of limited non-US exposure, an overweight to growth assets entering the month, as well as Q1 fees being assessed at the beginning of the month.

WHAT MOVED MARKETS

Data on April 10th  showed CPI ticking higher for a third month in a row, increasing the perceived establishment of higher trending inflation and that the downtrend is stalling.  Yields backed up even further with the 10-year treasury hitting 4.5%, a level not seen since the end of last November.   The potential extended trend likely pushes rate cuts farther into the future, increasing the chances that restrictive rate levels will cause some harm.  Stocks and bonds sold off on the news.

The very next day, producer price index (PPI) data for March was released, offsetting the previous days data.  PPI came in tamer than expected, with wholesale costs rising .2% vs .3% expected reflecting less inflationary pressure than the CPI data.  PPI data measures what businesses pay other businesses for their goods.  Inflation trends tend to lead from this wholesale level before hitting consumer prices.  This data offset the concerning CPI data the day before, and markets responded positively, reversing the prior days declines and closing the session where the prior day opened.

In our opinion, the Fed does not need to cut due to the underlying strength in the economy.  Again, perception and expectations tend to be a stronger driver of market movement than reality, and the expectation that the Fed’s next move is a rate cut is enough of a carrot to keep the horse moving forward.  Whether the fed cuts three times or one, in June or august (Or later), is less relevant than the expectation that the Fed will cut at some point.

Around mid-month, with CPI and PPI in the rearview mirror, tensions in the middle east stoked fears about an Iranian retaliation.  Rates continued to move higher, which further pressured stocks.  While the Iranian attack yielded no damage in Israel, the potential of a regional escalation made nervous markets even more so.  Treasury yields continued their advance, and stocks pulled back further.  Retail sales for March came in stronger than expected, which points to a strong consumer, which impacts market participants’ perception of Fed rate cuts.  Housing starts data reported a sizable year over year slowdown in home construction, one data point showing an area that is starting to slow.

Also mid-month was a slew of Fed member speeches, most of whom indicated a willingness to keep rates higher for longer in the face of their collective observation of inflation declines slowing.

On April 25 the First Quarter GDP reading showed a slowdown in growth, with GDP running at a 1.6% annualized pace versus the prior quarter’s 3.4%.  The market sold off on the news, likely due to concern about the impact of a slowdown in economic activity coupled with hotter inflation, a scenario that could change the soft-landing narrative.  However as the data was parsed through a bit deeper from the initial reading, stocks closed the day well off their lows.

Given the strength of March, we entered April with an overweight in Large Cap growth.  However, as the market started to deteriorate, we reduced our two largest positions in QQQ and SPLG and ultimately ended the month with more value and less growth than when we started the month.

Trends were shifting throughout the month, with very little getting traction to the upside.  During the month, our processes first line of defensive action occurred, which generally is adjusting exposure from asset classes that are going down more to asset classes that are declining less.  This process helps us stay fully invested (which is the objective in normal markets) while we wait for any trend changes to become more firmly rooted.  One never knows when the market will pop higher, so it is important to remain invested, but with a lower risk profile.

The market declined a little more than 5% at its trough, which we were widely expecting, as previously indicated in last month’s note.  5% pullbacks are quite normal, and frankly healthy to set up for a next leg higher.  This drawdown also helped a lot of funds move from a highly overbought status to a slightly oversold status.  Asset classes that are oversold have a higher potential to stabilize and return to higher prices moving forward.

Had the market continued to deteriorate and decline in the 10%+ range our secondary risk management component would start kicking in, which would be to raise cash and reduce exposure to risk assets.  That the market didn’t decline much more than 5-7% was very constructive for the eventual bump higher in the broad indices to start the month of May.

The economy continues to show resilience and strength even in an elevated rate environment.  We believe patience is necessary for likely continued signs of a slowdown in the economy.  A slowdown will likely have a positive impact on inflation, bringing it down further, but probably not on a month-to-month basis.  There are so many variables that are impacting sentiment and positioning, from geopolitical tensions, the upcoming election, rising treasury rates, and some signs of a more discerning consumer but a fully employed labor force.  Some of these competing macro forces make it challenging for trends to take hold, so there will likely be a bit of ups and downs in the coming months as the market may not end up higher than where we are now.

However, said strong economy should support current stock prices, barring any jarring or dramatic change to the underlying narrative – that the Fed will be patient in its preference to reduce rates in an effort to ensure that inflation will eventually get back to its 2% mandate.  This continues to take time, thus the requisite of patience.

We will continue to ebb and flow as mini trend changes occur, and eventually find stability and be well positioned to benefit from the next leg higher.  In our opinion, this will likely occur when inflation starts to tick back down closer to 2% and the Fed can eventually be more accommodative and cut rates once or twice.  One or two rate cuts should not have a material impact on economic activity, but it should on the margin.  But it’s the perception that the next move is lower rates that should spur additional buying interest, creating more demand in the market.

We are also entering the seasonally weak period of the year, where historically market gains are lower from May to October as they typically are from November through April

We will continue to follow our process to guide us objectively on where you should have the best probability of success from exposure to risk assets.