The stock and bond markets came under pressure in April as interest rates surged on disappointing inflation reports. The S&P 500 dropped 4.1% with technology stocks leading the index lower. Internationally, the developed markets shed 2.6%, but the emerging markets gained 0.4% on a rebound in Chinese stocks. China’s economic growth was surprisingly strong during the first quarter following a string of disappointments last year which pushed stocks sharply lower.

• Yields on 2-year and 10-year U.S. Treasury notes closed out the month at 4.7% and 5.0%, respectively. These were up from 4.2% and 4.6% at the end of March. With interest rates higher, bond prices moved lower. The Bloomberg Aggregate and the Bloomberg U.S Municipal Indexes fell 2.5% and 1.2%, respectively.
• The Bureau of Labor Statistics (BLS) reported its March Consumer Price Index (CPI) increased to 3.5% from 3.2% in February. The Core CPI, which excludes food and energy prices, was unchanged at 3.8%. Both CPI measures exceeded consensus forecasts by 0.1%. The Federal Reserve’s preferred inflation measure, the Core Personal Consumption Expenditures Price Index (PCE), increased 2.8% on a year-over-year basis. This was unchanged from February but above the median consensus forecast of 2.7%. The disappointing inflation reports raised concerns that the Federal Reserve will need to maintain interest rates higher for longer than previously anticipated.
• On May 1st, the Federal Open Market Committee (FOMC) kept the federal funds target rate range unchanged at 5.25% - 5.50%. At a press conference, Federal Reserve Chairman Jerome Powell indicated that higher than anticipated inflation had lowered the FOMC’s confidence that fed funds rate cuts are appropriate. However, he viewed fed funds rate increases as unlikely in the future and expects improving supply-side factors to ease inflation over the course of the year.
• The Department of Commerce estimated that the U.S. economy grew at an annualized pace of 1.6% during the first quarter. This fell short of the consensus forecast of 2.5% due to a slower pace of inventory accumulation and an increase in the trade deficit. Market reaction to the news was muted because personal consumption and business investment remained strong.
• The labor market has remained firm in 2024 but has recently shown some signs of softening. On May 1st, the BLS reported that unfilled job openings slipped to 8.5 million in March from 8.8 million in February. The ratio of job openings to unemployed job seekers dropped to 1.3 from a peak of 2 in 2022. On May 3rd, the BLS reported non-farm payrolls increased by 175,000 in April. This was well below 315,000 in March and the consensus forecast for April of 240,000. The unemployment rate increased slightly to 3.9% from 3.8% in March. Annual wage growth slowed to 3.9% from 4.1%.
• First quarter corporate earnings reports were strong. As of May 3rd, 397 S&P 500 companies reported their results with nearly 80% of them exceeding analyst estimates. Analysts estimate overall S&P 500 earnings grew 7.1% from last year’s first quarter. This estimate is up from 5.1% at the start of the reporting period. Analysts project full calendar year 2024 earnings growth at 10.4%, up from 9.9% previously.

Despite April’s pullback, the S&P 500 has performed well this year with a gain of 8% through May 3rd. Consumers are not happy about inflation, but their spending has remained strong thanks to favorable labor market conditions. This has supported corporate earnings and stock prices. However, signs of strain are emerging, particularly amongst lower income consumers. Excess savings built up during the pandemic have been drawn down and credit card balances have risen sharply. This could put a squeeze on corporate earnings for retail focused companies through the remainder of the year. However, technology and communications services focused companies should continue to do well given the spending boom in artificial intelligence.

• While the earnings backdrop should support further gains in the stock market this year, valuations remain extended with the S&P 500 trading at close to 21 times projected 2024 earnings. This leaves the market vulnerable to sharp pull backs should future economic data reports prove disappointing. Recession worries could resurface at any time and geopolitical risks remain elevated.
• As of May 3rd, the fixed income markets recouped some of their April losses but yields on U.S. Treasury securities and investment grade corporate bonds remain elevated in the 4.5% to 5.7% range for maturities 10 years and under. This compares with the cash dividend yield on the S&P 500 of 1.4% which is near its historic low of 1% reached in 2000. By this comparative measure, bonds appear to be a good value relative to stocks. The yields on Treasury securities and corporate bonds also look attractive when compared with current and projected inflation rates.