Despite the overhang from last month’s bank turmoil, markets rebounded as investors re-focused on earnings, economic and inflation data. While most data suggest the Federal Reserve Bank has not completely ended their monetary tightening cycle, they are closer to a “wait and see” environment.
Equity markets endured some volatile trading during the month but ended with the strongest month-end rally since January. Early in April, stocks fell as Costco reported its first monthly same store sales drop in 3 years. Bank earnings caused tension but were generally positive and gave some relief to the sector. After First Republic Bank reported earnings, banking jitters flared again. Large cap tech continued to dominate, and companies such as Microsoft, Alphabet, and Visa released stronger earnings that helped push stocks higher into month end. In April, the SPX rose 1.56% and the Dow Jones Industrial Average rose 2.57%. The Nasdaq finished only slightly higher (+.07%) despite larger components. Communication services, consumer staples, energy, and financials all rose by over 3% last month. Lagging sectors included consumer discretionary (-.99%) and industrials (-1.22%).
Interest rates were a “mini roller coaster” during April. Lower inflation data and corporate guidance warnings drove rates lower to begin the month. This reversed, as the banking sector stabilized, and a decent jobs report drove yields right back up to the higher end of their recent range. Bond prices ended higher as First Republic Bank halted trading on the final trading day in April. For the month, 2-year notes fell by only 2 basis points to yield 4% and 10-year notes fell by 5 basis points to yield 3.42%. Interestingly, T-bills were the most volatile sector of the yield curve. Both changing views on the FOMC’s upcoming May 3rd meeting, and angst over the new debt ceiling argument, drove very short maturities lower in yield while longer bills drifted higher. Most sectors of fixed income, except for municipals, had modestly positive total return figures for the month.
Credit sectors, including both high yield and investment grade, kept pace with government bond performance. New issuance was abundant as demand picked up after last month’s “stand-still” in corporate bonds. Absolute yield levels and recession worries have supported corporations with strong balance sheets. Investment grade sectors continue to outperform government sectors with continued demand for yield. Even the “financial-sensitive” preferred market rebounded by over 1% last month.
Municipal bonds may have been the only sector to report negative returns last month. Treasury market volatility has left municipal bond ratios at historic lows. This volatility combined with fund outflows and anticipation of new supply, accounted for a slight sector reversion.
April began as eventfully as March. On the first trading day, OPEC announced a surprise cut to production driving oil prices up by 8%. Soon after, earnings and economic data drove markets and FOMC predictions.
The employment data continues to hold up despite sweeping layoff reports from all sectors. This past month, it looked like it was going to turn. Employment reports in the ISM fell and the JOLTS report was the lowest since 2021, as job openings decreased from 10,563k to 9,931k. Even ADP fell, and ISM reports showed some service sector weakness. But, on Good Friday, with stocks closed and bonds open, the non-farm jobs report beat estimates once again (236K jobs reported), and a slight revision higher to February report. Yields began their mid-month climb higher, as investors viewed the strong data as fuel for the FOMC to keep “stepping on the brake”.
Inflation data over the month was supportive of a “soft-landing” scenario. Both CPI and PPI came in lower than expectations. While positive earnings reports flowed, lower inflation data supported a ‘mild recession or no recession’ scenario. Later in the month an advance Q1 GDP report revealed a lower-than-expected US GDP of 1.1%, but some higher inflation figures. The GDP price index rose slightly to 4%, and the Core PCE jumped to 4.9% from 4.4%. These reports could keep the Fed hawkish in May.
The Fed will meet on May 3rd, and current expectations are for them to raise rates by 25 basis points. Despite continued fragility in the regional banks from day to day, the FOMC could likely be summed up by Richmond Fed President Thomas Barkin on April 12th; “I’m waiting for inflation to crack…Its moving in the right direction…but, in the absence of a month or two months or three months with inflation at our target, it’s hard to make the case that we’re compellingly headed there”.