Equity Markets Post Worst Month of 2024
Amid hotter inflation, hawkish Fed commentary, and geopolitical tensions, all three major stock market indices were down in April. The Dow Jones Industrial Average (-5.0%) had its worst month since September 2022 while both the Nasdaq Composite and S&P 500 posted their largest monthly declines since September 2023 (-4.4% and -4.2%, respectively). US mid-caps (-6.0%) were among the worst performers, followed by US small-caps (-5.5%) and US value (-4.3%). Bonds were also down as 7-10 year US Treasuries fell 3.1%, investment grade corporates decreased 2.6%, and the US Aggregate Bond Index declined 2.4%. Aside from crude oil (-0.4%), commodities fared well as silver was up 5.7%, gold increased 3.0%, and broad-based commodities gained 2.4%.
Fed Points to a Lack of Progress on Inflation
In his latest speech at the Wilson Center’s Washington Forum, Federal Reserve Chairman Jerome Powell revealed that monetary policy may have to remain restrictive for longer. “More recent data shows solid growth and continued strength in the labor market, but also a lack of further progress so far this year on returning to our 2% inflation goal,” he stated. This followed stubborn March Consumer Price Index (CPI) prints released earlier in the month, the latest of three straight hotter than expected inflation reports in 2024. His messaging, along with that of other policymakers, has turned more hawkish and contrasts with last month’s Fed forecast of three 25 bps rate cuts in 2024. At today’s May FOMC meeting, the Fed is largely anticipated to keep interest rates unchanged, leaving the fed funds rate at the 5.25–5.50% range. Now, only one to two 25 bps rate cuts are priced in for 2024, with the first to occur in either November or December per the CME FedWatch Tool.
Stagflation or Slow Disinflation?
The Last week’s first preliminary GDP print for Q1 2024 came in at 1.6%, below both the 2.2% estimate and last quarter’s 3.4%. At the same time, inflation via PCE (Personal Consumption Expenditures Index) for the period rose 3.4% for the quarter, marking its biggest gain in a year. This raised stagflation concerns, an environment characterized by lower growth, higher inflation, and rising unemployment. However, as growth hasn’t weakened notably and the labor market remains strong, it is more likely the US is facing slow disinflation.
Will CPI Remain Above Target in 2024?
As per Bespoke Investment Group, the chart below displays various annualized CPI paths through the end of 2024 based on different month-over-month readings held constant. The only scenarios that bring year-over-year CPI below or close to the Fed’s 2% target through December is if each monthly measure until then is flat (purple line) or increases by only 0.1% (red line), which seems unlikely.
Europe to Cut Ahead of the US
Europe appears to be experiencing greater economic troubles than the US. For instance, manufacturing PMIs in the US have recently improved into expansionary territory, while in Europe, they seem to be trending lower. Additionally, credit standards in Europe remain restrictive while loan demand is falling. Inflation prints have also been coming in lower in Europe relative to the US, and if they continue to show disinflationary progress, it may warrant the ECB to initially cut interest rates as soon as June.
Broadening Earnings Growth
Earnings growth for the Magnificent Seven has been impressive, but it's expected to slow after Q1 2024. Meanwhile, forecasts show earnings growth for the S&P 500 excluding the Magnificent Seven outpacing that of the seven towards the end of 2024. It's unlikely these select stocks will continue to grow indefinitely. Is it time to consider broadening one’s exposures?
Stocks will Need to Deliver on Earnings, but Remember, the Fed has Rate Cuts in its Back Pocket
There's always room to be bearish, but we find it hard to believe that the average US high quality stock won't trend higher in the next 15-18 months. Expectations are high and stocks will likely need to deliver on their earnings, but in the end, the Fed has a few rate cuts in its back pocket should circumstances take a turn for the worse.
In the past six months, the market has gone from pricing in two 25 bps cuts in 2024 to seven to just slightly more than one today. This volatility is more of a reason why we encourage investors not to be tactical, but to stay strategically long.
We'd rather be OW stocks that have strong, high quality franchises, pay dividends, and can provide a call option on earnings compared to bonds which are likely to struggle with still-elevated inflation and less rate cuts to occur than originally priced in.
Additionally, we’ve owned gold in our ETF portfolios for many years. Interestingly, since October 31st, 2022, through April 30th, 2024, it is up 40% cumulatively, outperforming the S&P 500’s return of 33% over the same period. Here are three reasons why we still find gold attractive: 1) Headwinds of inflation, 2) looming deficit concerns/more money being printed, and 3) increased economic volatility.
Warranties & Disclaimers
As of the time of this publication, Astoria Portfolio Advisors held positions in SPYG, SPY, SPYV, SPDW, SPMD, SPSM, SPEM, JNK, SPBO, SPAB, MUB, IEF, SPIP, GLD, SLV, USO, BCI, TLT, and LQD on behalf of its clients. There are no warranties implied. Past performance is not indicative of future results. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. The returns in this report are based on data from frequently used indices and ETFs. This information contained herein has been prepared by Astoria Portfolio Advisors LLC on the basis of publicly available information, internally developed data, and other third-party sources believed to be reliable. Astoria Portfolio Advisors LLC has not sought to independently verify information obtained from public and third-party sources and makes no representations or warranties as to the accuracy, completeness, or reliability of such information. Astoria Portfolio Advisors LLC is a registered investment adviser located in New York. Astoria Portfolio Advisors LLC may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.