April 2024 Market Lookback
By: Mario Ismailanji · May 01, 2024 · Reading Time: 5 minutes
Caution emerged in global markets in April, as the S&P 500 snapped a five-month streak of gains. Conflict in the Middle East continued, with a series of escalations between Israel and Iran sparking fears of a broader conflict. Inflation data surprised to the upside, as Treasury yields rose alongside fading Federal Reserve interest rate cut expectations. And while valuation multiples compressed on these moves, earnings expectations continued to grind higher on resilient economic growth.
Macro
• Q1 GDP growth clocked in at a seasonally adjusted annual rate of 1.6%, below all economist estimates.
• 303k nonfarm jobs were added in March.
• March CPI surprised to the upside at 0.4% m/m and 3.5% y/y.
• The March ISM Manufacturing PMI came in above estimates at 50.3, while the Services PMI was below estimates at 51.4. Both indexes measured above the neutral threshold of 50.
• The Q1 Employment Cost Index came in above expectations at 1.2% q/q.
• The Conference Board’s Consumer Confidence Index unexpectedly fell from 103.1 to 97.0 in April, with both the Present Situation and Expectations components contributing to declines.
• Home prices grew faster than expected in February, with the Federal Housing Finance Agency estimating m/m price appreciation of 1.2% (vs the estimate of 0.2%), and the S&P CoreLogic Case-Shiller index rising 0.6% (vs the estimate of 0.1%).
Equities
• The S&P 500 fell 4.1% in April, the first down month since October.
• Bottom-up 2024 EPS estimates for the S&P 500 oscillated around $243 in April, while top-down strategist estimates rose from $244 to $246.
• Small-cap stocks underperformed large-cap stocks by 2.8 percentage points.
• Emerging market stocks beat the S&P 500 by 4.5 percentage points, the first outperformance since September 2023 and the most since November 2022.
• The Utilities sector was the only sector with a positive return.
Fixed Income
• Treasury yields rose 40-50bps in April, with longer-term maturities rising slightly more than shorter maturities.
• Interest rate volatility (MOVE Index) began the month at a 2-year low of 86.3 and rose to as high as 121.2 on April 15, before finishing the month at 107.5.
• High Yield bonds outperformed Investment Grade bonds by 1.6 percentage points, the 10th month of outperformance in the last 13.
A Streak Gets Broken
Through March, the S&P 500 had gone five straight months without falling, rising 25.3% over that period, and comfortably outpacing the index’s average annual price increase of 7.8%. But all good things must come to an end and while the bull market might not be over just yet, that streak of monthly gains ended in April.
The fact that we had a pullback in the market isn’t all that surprising. The average drawdown in any given year is 15.6%. Instead, the surprise was what drove stocks lower.
The price of a stock, or in this case a basket of stocks, can be broken down in many ways but the most common is this: The earnings they generate and a valuation multiple for those earnings. All else equal, if investors expect corporations to earn more, stock prices generally move higher. But when we look under the hood, we see that that’s not exactly what happened in April.
Forward EPS expectations rose 1.4% last month, yet stocks still fell. Those negative returns can be attributed to a decline in the P/E multiple. Despite revising earnings expectations higher, investors valued those earnings less than they did at the start of the month. To put it in perspective, multiple expansion was responsible for over 70% of year-to-date gains. By the end of the month, that fell to only 25%.
Volatile Undercurrents
It can be hard to precisely identify the cause of a move in valuations. Sometimes very little has changed on a fundamental level and investors grasp at straws trying to make sense of things. Other times, there is no shortage of possible culprits working against markets, and such was the case in April.
To start off, the geopolitical landscape has been tumultuous for most of the year but conditions continued to worsen in April, as a series of escalations between Israel and Iran raised fears of a possible disruption to oil supplies. Furthermore, upside inflation surprises pushed Treasury yields to six-month highs. With U.S. growth remaining resilient relative to other major economies, the U.S. dollar appreciated versus other major currencies. The Japanese Yen was a victim of this strengthening, with the Yen piercing through 160 before authorities likely intervened to prevent further depreciation. Given this backdrop, one might expect gold to be having a tough time, but that’s also up on the year.
If this toxic mix of oil, gold, Treasury yields, and the dollar all rising wasn’t enough, tax season may have been another catalyst for some selling. Why? Because 2023 was a great year for stocks, which may have driven higher capital gains tax that needed to be covered in April. Let’s see if markets can bounce back in May.
Performance data quoted represents past performance. Past performance does not guarantee future results. Market returns will fluctuate, and current performance may be lower or higher than the standardized performance data quoted.