April 2024 Market Commentary
April 22, 2024
- S&P 500 sets new record high.
- Consumer prices experience their largest monthly gain since September raising questions/concerns about the number and timing of Fed rate cuts.
- Fed reaffirms forecast calling for three rate cuts before year end.
- Returns: S&P 500 3.1%. Bloomberg US Aggregate Bond index 0.9%.
At some point, every sports fan has been torn between wanting their team to do well now and risk a higher draft pick in the future, or see their team underperform in the near term with the hopes that a high draft pick will improve the team’s long-term fortunes. In a similar fashion, investors are currently torn between wanting their team, i.e. the economy, to do well now and jeopardize future draft picks, i.e. rate cuts, or see the economy continue to slow and possibly risk recession in the hopes that it will accelerate the timing, and possibly increase the number, of Fed rate cuts.
Within that framework, March gave investors reason to cheer, or not, depending on their views. Data released during the month indicated that economic growth remains resilient with many measures exceeding expectations. At the most macro level, revised GDP data showed the economy entered 2024 with strong momentum after growing at an annualized rate of 3.4% in 4Q23, supported by consumer spending which grew 3.3%, its fastest pace since 1Q23.
Strong labor markets underpinned consumer spending in 2023 thereby helping the economy avoid recession. That trend has continued in 2024 as evidenced by the March employment report which saw nonfarm payrolls add 303K new jobs, pushing average job growth in 1Q24 to 276K, 25K better than the 2023 average monthly gain. For investors hoping for more rate cuts sooner, the jobs data was disappointing. With respect to inflation, annual wage growth in March fell to 4.1%, its slowest pace since June 2021.
Wage growth is an important factor in the Fed’s monetary policy calculus with slower growth suggesting a potential easing of future inflationary pressures.
Inflation data released in March provided a mixed picture. Compared to January, headline consumer prices in February rose 0.4% to their fastest pace since September, pointing to a possible resurgence in price pressures. Compared to a year ago, the consumer price index (CPI) rose 3.2%, leaving it stuck within the 3.0-3.7% range that it has found itself in since last June. While improvements in headline CPI have largely stalled, core CPI, which excludes food and energy prices, slowed 0.1% to 3.8%, its lowest level since May 2021. As measured by CPI, be it headline or core, inflation remains well above the Fed’s longer-term target of 2%.
On a more positive note, core personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, slowed on an annual basis to 2.8%, its lowest level since March 2021. The current noticeable gap between core CPI and PCE is a function of the goods and services measured in each index and the weights assigned to those items. Currently, the largest source of difference between the two measures is the cost of housing. While it is up a little less than 6% in both indexes, the weight of housing in core CPI is ~2.5x what it is in core PCE. To a lesser extent, strong increases in auto insurance rates have also put upward pressure on core CPI. Though rent growth has slowed in recent months, it has yet to be reflected in official inflation measures. When it does, the expected result is a further slowing of inflation.
With economic data to start the year remaining relatively strong and improvements in inflation slowing, investors continued to lower their expectations for Fed rate cuts during the month. At the start of the year, markets were pricing in as many as six cuts before year end. By the end of March, those expectations had fallen to three. Less clear, however, was how recent economic data might be impacting the Fed’s own forecasts. Investors got their answer following the Fed’s March FOMC meeting. Despite recent economic data, the Fed reaffirmed its expectation for three rate cuts. However, the underlying details suggested a more hawkish stance, as the range for the year-end Fed Funds rate shifted from 4.4-4.9% to 4.6-5.1%, even as the median projection remained unchanged. Also noteworthy within the projections was a slight increase to the longer-term Fed Funds rate, from 2.5% to 2.6%; a strong upward revision to 2024 GDP, from 1.4% to 2.1%; and a small upward revision to core PCE, from 2.4% to 2.6%. Overall, the Fed’s projections effectively acknowledged the stronger economic growth, stubbornly high inflation, and possibility that rates could remain higher for longer. Speaking after the Fed’s meeting, Chair Jay Powell reiterated comments that he and other Fed officials had made previously about the timing of rate cuts by stating that the Fed “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably down toward 2%.” Something that recent inflation data is complicating.
The Fed’s affirmation of its rate cut outlook, combined with continued strong economic growth helped pushed markets higher, with the S&P 500 ending the month at a new record high, capping its best first quarter performance since 2019. For the month, large caps (S&P 500) gained 3.1%, while small caps gained 3.4%. International markets also enjoyed positive returns, with developed markets (MSCI EAFE) gaining 2.8%, while emerging markets (MSCI EM) rose 2.2%.
Fixed income markets experienced a relatively quiet month as investors paused to digest the recent uptick in inflation. Despite that, the Bloomberg US Aggregate Bond Index, the broadest measure of the US bond market, gained 0.9%. Treasury yields experienced some intra-month volatility, peaking mid-month just before the Fed’s March FOMC meeting. Prior to the meeting, the market had begun preparing for the Fed to reduce their expected 2024 rate cuts from three to two. However, after the Fed re-affirmed its expectations for three rate cuts this year, the market rallied to close the month with yields showing limited change. For the month, the 2-Year Treasury yield gained 0.10% to end at 4.63%, The 10-Year Treasury yield was effectively unchanged, gaining just 0.03% point-to-point, to end the month at 4.21%.
Reflecting the general calm in fixed income markets, the MOVE index, which measures U.S. bond market volatility, reached its lowest level since February 2022, just before the Fed commenced its current tightening cycle. The market is now essentially in wait-and- see mode as it awaits further economic and inflation data. While there aren’t wide-spread expectations that the Fed will need to raise rates again, the recent inflation numbers have raised doubts about their ability to cut.
In the municipal market, the 10-year AAA muni yield saw similar results, with yields dropping just one basis point on the month. Shorter municipal yields saw the biggest jump on the month, with the 2-year AAA muni yield finishing the month at 2024 highs. Municipal bonds had become relatively expensive earlier this year, with Treasury bonds offering better tax adjusted yields. The move higher this month on those shorter municipal yields started to bring more relative value back to the muni market.
For investment-grade corporate bond issuers, March capped the strongest start to a year on record, as companies issued $530B in debt in 1Q24, surpassing the prior high of $479B. Relative to the spike in interest rates experienced in 4Q23, companies appeared to be trying to take advantage of the general decline in rates witnessed in 1Q24, along with continued strong investor demand.
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Information and research contained herein do not represent a recommendation of investment advice to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment, and it does not constitute an offer or solicitation to buy or sell any securities. It is not possible to invest directly in an index. There is no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. Past performance is not a guarantee of future results. These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. The views and opinions expressed in this publication are subject to change, at any time, without advance notice or warning.
