April market performance

The stock market had one of its worst months since the rally began late last year, with the S&P 500 down over 4%. Tech stocks were not immune with the NASDAQ losing 4.4%. Small-cap stocks were down almost 7% for the month and, as of the end of April, were down on the year. Crypto was not immune, with Bitcoin being down about 25% for the month. Usually, when stocks struggle, you see bonds rally, but we did not see that last month. Bonds were also off about 4% as yields rallied. One of the few asset classes to experience positive performance for the month was commodities, with gold, silver, and copper all up between 3-6%.

• We have discussed the changing relationship between stocks and bonds
• Historically portfolios were constructed with a mix of stocks and bonds because of their negative correlation to each other
• In the post-COVID world, with inflation higher than typical and interest rates higher than historically, this has not been the case
• The one bright spot last month was commodities, specifically precious and base metals, which traded higher
• We continue to believe that this changing relationship between stocks and bonds will be a challenge for classic 60/40 portfolios

Fed takes rate hikes off the table

The Federal Reserve had its most recent meeting this week and did not move on rates, as was widely anticipated. While interest rate cuts were not expected, what was more interesting was the line of questions about rate HIKES and if there was potential for them in the future if inflation persists. Chairman Powell categorically seemed to have taken this off the table (at least for now). This served as a relief to markets since several Fed officials had discussed this option recently.

• While the Fed is still very important to markets, we argue that they are not as important as before
• This is largely due to the larger role of the Federal government in our economy
• As discussed many times in the past, the Federal government is running a massive fiscal deficit
• This has a stimulative impact on the economy
• On the margin, this dampens the impact that Fed policy has on the economy
• We continue to hear more discussions of “fiscal dominance” in the fringes of financial circles
• We believe this is going to become more mainstream as out-of-control fiscal spending continues unabated

Goldilocks jobs picture

April created 175,000 jobs, less than the 240,000 being forecasted. The unemployment rate ticked up to 3.9%, higher than the 3.8% anticipated. Wage growth came in a bit below expectations, at 3.9%, below the 4% expected. Overall, the report was heralded as a goldilocks scenario, with hiring slowing but not too much and unemployment rising but not too much. While earlier in the week, wage inflation readings (ECI and Unit Labor Costs) surprised to the upside, the market was relieved not seeing this in the NFP number.

• The jobs report serves as a vindication for those forecasting a soft or no-landing scenario
• While it is one data point, it is in the right direction
• Narratives change quickly and this will likely revive the soft landing narrative that drove stocks at the end of last year and earlier this year
• Rate cut expectations increased slightly but are still way below where they began the year
• We will need to see more data before the picture becomes clearer

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