After five consecutive positive months, the stock market's performance reversed in April. Declines in both equity and fixed income markets were primarily due to persistent inflation fears and expectations that the Federal Reserve wouldn’t ease monetary policy as soon as expected. The month also saw geopolitical tensions increase, although it had a modest impact on the markets. Fortunately, the volatility was short-lived as stocks cut some of their losses in the back half of April and early May.
The significant headline from this month's economic data was the upside surprise in U.S. inflation for the fourth month in a row, as indicated by the Consumer Price Index (CPI). Also, first quarter GDP was slightly weaker than anticipated, expanding by 0.4% quarter over quarter, though this followed an extremely strong end to 2023.
Even though the GDP was lower than expected, the economy has expanded for seven quarters in a row. The labor market continued to show signs of strength as the unemployment rate fell, and job gains accelerated. Despite there not being an official Fed meeting in April, Jerome Powell suggested that this data could delay the start of rate cuts into later this year.
Broad-based declines were seen across regions and market capitalization. U.S. large cap stocks saw a -4.1% decline, while mid and small cap stocks were down -6.0% and -5.6%, respectively. Foreign developed stocks managed the volatility better, down only -2.5%. Emerging markets were the lone bright spot in the equity markets, up 0.5%. The volatility also hit the bond market.
In fixed income, government bond yields rose to fresh year-to-date highs. The 10-year treasury rate finished at 4.7% after starting the month at 4.2%. 2-year treasury yields rose 40 bps to 5.0%. Given the inverse relationship of yields and prices, the U.S. aggregate bond market was down -2.5%. in April.
Elsewhere, we saw commodity prices continue to rise. Gold had another strong month up 5.8%, locking in its best two month return since 2020. Industrial metals also had a strong month, up over 12%.
Overall, April 2024 saw a reversal in stock market sentiment, rising bond yields, and continued economic growth, despite evidence of sticky inflation and geopolitical tensions. Fortunately, as May continues to progress, much of the losses from April have been recouped on the back of the latest “Fed speak” and economic news. More to come!