Disappointing Growth & Sticky Inflation Sink the Markets in April
Those pesky April showers showed up – right on schedule – to rain all over Wall Street’s parade. After a powerhouse first quarter in which the S&P 500 and Dow Jones Industrial Average both hit new record highs, the markets pulled back, handing Wall Street its first down month of the year. The bond market also struggled, pushing long-term interest rates to their highest levels since November. Why? The simple answer is inflation. Of course, when we’re talking about the financial markets, nothing is ever that simple.
First, it’s important to know that April’s downturn was no surprise. I said in my last two newsletters that a pullback was likely, as I’ll discuss further. How bad was it? Well, the Dow had its worst month since September 2022, losing 5%. The S&P slid about 4.2%, while the Nasdaq lost 4.4%. The declines marked the end of five-month winning streaks for all three indexes.1
One factor in the pessimistic turn by investors was the latest inflation data, which saw consumer prices rise in March by 3.5% annually and was up from February’s increase of 3.2% and January’s 3.1% bump.2 On top of that, economic growth also slowed in the first quarter. The US Real Gross Domestic Product rose just 1.6% from January to March. That was well below the consensus forecast of 2.5%, and a significant drop from the previous quarter’s 3.4% increase.3
Putting all this data together, one concern is that when you have high inflation and a stagnant economy, you get stagflation. But keep in mind the markets are forward-looking, and the reality is that we’re nowhere near stagflation territory right now. In fact, despite its stubbornness, inflation is still well below the highs it was hitting two years ago, and still heading in the right direction. Meanwhile, although growth is obviously slowing, the economy certainly isn’t stagnant.
The Fed Factor
But, again, the markets are forward-looking, and investors had been looking forward to the possibility that the Federal Reserve might soon start lowering short-term interest rates after hiking them to their highest level since before the Financial Crisis to fight inflation. But with inflation stuck at over 3% – and still higher than the Fed’s goal of 2% – the prevailing thought now is that rates won’t start coming down until much later this year. That belief is probably the main reason the bond market also took a pessimistic turn in April, which resulted in long-term interest rates jumping significantly, as I noted. The interest rate on the 10-year government bond went from about 4.25% at the end of March to 4.68% at the end of April, a jump of about 10%.4
The good news, however, is that although the Fed probably won’t be lowering rates anytime soon, they also remain committed for now to not raising rates further, despite inflation’s stickiness. Chairman Jerome Powell said as much at the Fed’s most recent policy meeting on the first day of May.5 While that’s reassuring to some degree, there’s no denying some investors are probably starting to question again – based on the latest data – whether the Fed will be able to achieve a “soft landing” after all. That means the ability to successfully bring inflation down to normal levels by raising rates without tipping the economy into a recession. Historically, a “soft landing” by the Fed is very rare.
Still, there certainly is not enough evidence yet to suggest that either stagflation or a recession is unavoidable. And, as I’ve pointed out in previous newsletters, even if a recession does occur, the Fed is strategically well-positioned to combat it. Investors know all this, too, but it’s still no surprise that the latest inflation and growth data should have injected a degree of cautiousness into the previously high-flying markets.
Your Portfolios
It was certainly no surprise to me. As mentioned, I pointed out in my two previous newsletters that a good portion of the gains we’d been seeing in our own portfolios based on the strong markets were only speculative, and that we might soon give them back. That’s exactly what happened in April, as you’ll see in your latest statements. At the end of March, our portfolios of bonds and bond-like instruments were up over 2% on average for the year. With the big spike in long-term rates and other factors, we gave about half of those gains back last month, meaning our year-go-date average is now closer to 1%, depending on your holdings.
The good news is that a 1-1.5% drop in value is still much better than the 4-5% losses that Wall Street suffered. The even better news, as I always point out, is that any loss or gain in value is largely irrelevant when you’re investing for income because your interest and dividend return don’t change. Even better still, if you’re reinvesting your income return when the market drops it means your future income is just going to grow more rapidly because you’re reinvesting at a cheaper price. As always, contact the office at any time if you have any questions. Meanwhile, enjoy the May flowers and the rest of your spring!
1 “Dow Tumbles 570 Points to Wrap Up Worst Month Since September 2022 as Bond Yields Rise,” CNBC.com, April 30, 2024.
2 US Bureau of Labor Statistics, bls.gov
3 Bureau of Economic Analysis, BEA.gov, April 24, 2024
4 MarketWatch.com
5 “The Fed Rate Decision Meeting is Today. Here’s Their Rate Decision,” CBS, May 1, 2024
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