Market Commentary: April 2023
At a Glance
- Stocks and bonds cooled from Q1 gains, but still rose modestly in most sectors in April
- Equity volatility declined as investors waited for clarity on the economy and Fed policy
- Markets appear to have priced in just one more 25 basis point rate increase this year
- Economic activity has slowed, but growth remains solid, led by a resilient consumer
Wait and see
After a strong first quarter, equity markets cooled in April as investors sought to balance concerns about a weakening economy with expectations that the Fed was nearing the end of its tightening cycle. Amidst the uncertainty, stocks managed to eke out modest gains for the month in most segments. These gains came with notably lower equity market volatility, with the VIX index ending the month at 15.78, the lowest month-end level since December 2019.1 Interest rates were also little changed over the month, with Treasury yields down 4 basis points for the 10-year and 2 basis points for the 2-year.2 The relative calm in stock and bond markets may reflect investor caution on betting too strongly in either direction on the path of interest rates and economic conditions.
Equity Returns: April and Year-to-Date 2023
Stocks posted mixed, but solid returns overall in April, led by a 2.57% gain for the Dow, which had lagged substantially in Q1.5 The broader S&P 500 index was up 1.56% while the NASDAQ rose just 0.11% after gaining over 17% in the first quarter.6 7 In the US, the economically sensitive small cap sector continued to lag in April as concerns about the slowing economy increased.8 Outside of the US, developed market equities gained 1.7% with stronger gains in Europe and weaker results in Asia and Emerging Markets.9
Defensive sectors (consumer staples, healthcare, utilities) led the market in April after a weak first quarter.10 Cyclical sectors (industrials, consumer discretionary and materials) posted slightly negative returns for the month. Technology stocks cooled in April, but are still up over 20% for the year. The communications services sector posted the highest return for both the month and year-to-date, bolstered by strong Q1 earnings results from Alphabet and Meta, the sector's two largest constituents. The financial sector rallied off of its lows as investors warmed to the idea that the worst of the troubles were behind the regional bank sector.
Fixed Income Returns: April and Year-to-Date 2023
Fixed income markets continued to post positive returns across all segments with longer duration assets faring best.11 Interest rates were little changed in April, rising steadily in the first half of April and then falling equally in the latter half of the month.12 Markets seem to be pricing in another 25 basis point interest rate increase at the Fed’s May 2–3 meeting, but also expecting that will be the last one for this tightening cycle.13
Signs of a slowing economy?
As has been the case for much of this year, April’s economic data painted a mixed picture. Inflation continued to ease but remained at a high level. The Fed’s preferred inflation gauge, the Core Personal Consumption Expenditure price index, was up 0.3% in April from March, but was still up 4.6% from a year earlier, well above the Fed’s 2% target.14 While pandemic influenced supply chain issues have certainly eased, continued tight labor markets and solid economic activity have kept inflation from falling faster. As a result, expectations that the Fed will actually cut rates in the second half of this year seem optimistic. Indeed, in his statement following the Fed meeting on March 22nd, Chairman Powell indicated, “The process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy.”15
The uncertainty of that path has much to do with the pace of economic activity. Growth is certainly slowing, but not yet contracting in most parts of the economy. Preliminary first quarter real GDP growth came in at 1.1%, down from 2.6% in Q4, with strong gains in consumer spending offsetting declines in corporate investment and inventory.16 Consumer spending drives the US economy and employment conditions underlie how strong consumer demand will be. Jobs increased by 236,000 in March and the unemployment rate remained at just 3.6%, signs that the labor market remains tight.17 Consumer spending is also influenced by changes in perceptions of wealth which can in turn be influenced by changes in home values, most households' largest asset. Home prices have been coming down since the middle of last year, with the most recent S&P/Case-Shiller National home price index off 5% since June 2022.18 On the corporate front, Q1 earnings released so far show a similar pattern – a slowing in earnings growth, but not yet a contraction.
It may be that we are just beginning to see the kind of slowing in the economy that will lead the Fed to end its current rate increase cycle in May. The glass half full scenario is that the rate increases so far will lead to a soft landing in the economy rather than a recession. This scenario seems to be what the markets have priced in. The glass half empty case is that continued strong growth keeps inflation high, forcing the Fed to keep rates “higher for longer”, a scenario that would certainly lead to downward pressure on most risky assets.