Monthly Market and Economic Update - April 2024

Current Market and Economic Conditions

• In April, the S&P 500 Index was down 4.08%, while the Bloomberg Barclays US Aggregate Bond Index was down 2.53% and the Bloomberg Barclays Municipal Bond Index was down 1.24%.
• After the best first quarter since 2019, the stock market stalled in April as investors came to realize that inflation and interest rates are not coming down as quickly as was expected at the beginning of the year. 
• The Federal Reserve has been consistent in their messaging. The stock and bond markets are adjusting to the new normal of “higher for longer” when it comes to the Fed rate policy and fighting to bring inflation under better control.

Bond Market     

• The combination of the sticky inflation and lower than expected first quarter GDP growth has the bond market looking for answers. The yield on the 10-year Treasury bond has risen ¾ of a point since the beginning of the year. This would suggest that the market is accepting that inflation is going to remain elevated in the near term. At the moment, the futures market is predicting that the Federal Reserve Open Market Committee is likely going to reduce the Fed Funds rate in September and December. However, that is less certain than what was projected at the beginning of the year when the futures market had been pointing toward four or more ¼ point reductions during 2024.
• For bond investors, the combination of higher current interest rates and potentially rising values due to the possibility of falling yields later in the year may result in a rather ordinary but potentially positive year for bonds. Given the volatility in bond values over the past few years, ordinary is likely welcome. The probability of a soft landing for the economy is increasing. 2024 started with strong results for the key indicators for economic growth – jobs growth, consumer spending, and industrial production. Despite numerous recession forecasts in 2022, 2023, and now going into 2024, the actual economy continues to grow. 

Stock Market

• A market valuation correction is generally defined by a temporary decline of at least 10%. The timing of market valuation corrections is never certain. However, they do occur just about every year at some point. Given the strong start to this year, and the fact that the valuations for the mega-cap S&P 500 growth stocks were getting stretched – again, the market is using the disappointing inflation and GDP numbers to take a breather. Technically, the S&P 500 Index is still not in correction territory, but it feels like the upward momentum has at least slowed for the moment. Investors should take note of the fact that value stocks, small cap stocks, and, especially, international stocks are not overvalued when compared to US large cap growth stocks. So, any correction may be muted as investors look for better valuations available elsewhere in the stock market. 
• It should also be noted that the market’s performance year to date has been better than expected relative to the coming election. Typically, the primary season has been characterized by a choppy to down market as investors try to sort out the wide range of policies for the numerous candidates vying for the chance to represent their respective parties. This year is different due to the fact that the two candidates have been known for some time. And, certainly, given that one is president, and the other was president, their policies are also very well-known and understood. This has allowed the markets to focus on economic factors like earnings growth, inflation, and interest rates rather than policy uncertainty. In a typical election year, once the primary season is over and the two candidates are confirmed, the markets generally move higher. Historically, 20 of the 24 election years since 1928 have been positive. This 83% winning percentage during election years is actually higher than the annual winning percentage for the stock market in general of 75%. The average return during the last 24 election years has been 11.5% which is also higher than the average return during non-election years of 9.8%. Contrary to expectations, election years have been better for the market than non-election years. This has played out regardless of whichever party wins. 
• The US economy has transitioned from the rapid recovery phase to a slower growth phase between 2020 and 2023. With the Federal Reserve prescribing strong medicine in the form of higher interest rates, certain market sectors and the overall economy have endured some short-term side effects. Now that the Federal Reserve is projecting a pivot to lower interest rates sometime in 2024, the markets are behaving as if we are in an economic recovery, which should mean leadership broaden out toward stocks that have been overlooked and undervalued. Those opportunities can be found in both US and international stocks. Investors should focus on the longer-term path of the stock market and the economy and take advantage of any short-term correction by rebalancing to their appropriate risk profile.

Portfolio Management

• The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors.  Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.