In April, we witnessed a sizeable retreat throughout the broad markets, signaling a pause in the optimistic rally we’ve observed thus far this year, particularly in the equity markets. This pull-back comes amidst heightened investor concerns with the near-term market outlook as well as mounting uncertainty in the economic landscape.
“the Fed’s expression of doubt regarding achieving its 2% inflation objective poses uncertainty to the economy and investors. While inflation has moderated over the past year, it remains elevated, with little progress recently toward the Committee’s target.”
In April, core inflation metrics demonstrated relative stability compared to the previous month. While headline CPI posted an uptick from 3.15% to 3.48% year-over-year rise, another critical indicator, PCE Core inflation, experienced a slight dip from 2.84% to 2.82% year-over- year. However, a closer look at the month-over-month changes in CPI reveals a noteworthy trend. Core CPI came in at 0.36% for March, matching the previous month’s figure of 0.36%. This annualized rate of 4.4% underscores the persistent challenges in aligning with the Fed’s target of 2% inflation. Despite efforts to mitigate inflationary pressures, the data suggests ongoing struggles in achieving sustainable price stability remain.
The third Federal Open Market Committee (FOMC) meeting of 2024 unfolded on April 30th-May 1st, maintaining the federal funds rate within the expected range of 5.25-5.50% for the sixth consecutive meeting. Notably, the Federal Reserve disclosed its plan to continue balance sheet runoff, yet did signal an upcoming shift as they intend to slow down the pace of runoff starting in June. This adjustment entails limiting the maximum amount of Treasury securities runoff to $25 billion per month, down from the previous $60 billion. [1] However, the Fed’s expression of doubt regarding achieving its 2% inflation objective poses uncertainty to the economy and investors. While inflation has moderated over the past year, it remains elevated, with little progress recently toward the Committee’s target. This stance raises questions about the feasibility of implementing three rate cuts this year, as originally outlined in the March Summary of Economic Projections.
Meanwhile, the latest U.S. jobs report for April painted a mixed picture for the labor market. Nonfarm payrolls rose by 175,000, though fell short of expectations, while the unemployment rate increased to 3.9%. Despite a slight rise in average hourly earnings, it remained below consensus estimates, indicating subdued inflationary pressures. This report further spurred a shift in the investors’ expectations of potential interest rate cuts by the Federal Reserve. Traders responded by pricing in a higher likelihood of just two rate cuts by the end of 2024, with the first anticipated in September. Previous expectations after the March FOMC meeting remained optimistic of three rate cuts this year, thus markets experienced a considerable retreat as investor expectations shifted lower throughout the month of April. Fed Chair Jerome Powell reinforced the cautious stance, acknowledging persistently high inflation and the lack of substantial progress in achieving the 2% target.
As we conclude the month of April, equity and fixed income markets have pulled back substantially, reflecting concerns around sticky inflation and adjustments to rate cut expectations. The S&P 500 returned a negative -4.06% for the month, with Mid and Small Cap sectors declining even more. Despite these sizeable declines, the ongoing Q1 2024 earnings season for S&P 500 companies has offered some encouraging positive news. Recent updates indicate a favorable performance for the first quarter compared to expectations, with both the percentage of companies surpassing earnings estimates and the magnitude of these earnings beats exceeding their 10-year averages. On a year-over-year basis, it marks the highest earnings growth rate since Q2 2022. Notably, 80% of S&P 500 companies have already disclosed actual results for Q1 2024, with 77% reporting earnings above estimates. However, some sectors like Energy, Health Care, and Materials show year-over-year declines in earnings. Looking forward, analysts continue to project robust year-over-year earnings growth rates for subsequent quarters, with expectations set for a significant uptick in earnings growth for CY 2024. [2]
Although corporate earnings are maintaining strong growth thus far, this remains consistent with previous and current analyst expectations, resulting in little positive market reaction in response. The encouraging data has been overshadowed, as heightened economic uncertainty and a shift in rate cut expectations have had a greater impact on market movements.
- https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20240320.pdf
- https://insight.factset.com/sp-500-earnings-season-update-may-3-2024
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~Diligently Yours,
Your Smarter Way Portfolio Management Team
Please note this is for information purposes only and should not be construed as investment advice or recommendations made by A Smarter Way to Invest. Please contact your Advisor if you have any questions about this market update report or if you would like to discuss your personal financial situation in more detail.
