April Market Commentary: What a Long, Strange Trip It’s Been

March Recap and April Outlook

Among the more interesting bits of Jerome Powell’s testimony to Congress last year was his admission that he’s been a Grateful Dead fan for 50 years. 

In his comments at the press conference after the March FOMC meeting, he affirmed that we will see rate cuts this year, even if the timing is, as of now, uncertain. If rates do fall, it will mark the end of a monetary policy tightening regime that started out weird as Powell delayed rate increases in the face of spiking inflation, and then quickly became almost surreal as the Fed raised rates higher and quicker than has been seen in decades. All of this has been accompanied by intense speculation around rates, which led to a lot of market volatility. 

The carnage in both the equity and bond markets that we saw as inflation continued to spike and rates went ever higher has reversed somewhat, as performance in equities and bonds has responded to the prospect of rate cuts, even if the timing continues to be delayed. 

As to when rates will be cut, as Powell continues to reiterate, it will depend on incoming data. The Fed is seeing recent stickiness in inflation as a bump in the road but has been clear that inflation needs to be lower before it declares victory. Strong labor markets are also making it difficult to justify a rate cut. 

Let's get into the data:

• CPI was still over 3%. CPI rose 3.2% for the 12 months through February. Core CPI, excluding food and energy, rose 3.8%, slightly down from January   
• Core inflation is now projected to peak at 2.6% in 2024. The Fed’s Summary of Economic Projections number is now higher than the 2.4% projected in December 2023. 
• Growth is projected to be 2.1% in 2024. The SEP’s March projection is up from 1.4% in December.  
• Non-farm payrolls increased by 303,000 jobs in March. The Labor Department’s Bureau of Labor Statistics  report was well above consensus expectations. Economists polled by Reuters had forecast 200,000 jobs, with estimates ranging from 150,000 to 250,000

What Does the Data Add Up To? 

The markets are having a goldilocks moment, as both equities and bond markets continue to anticipate rate cuts, if cuts seem to be perennially pushed further into the future.    The expectation of many economists, investors, and observers was that the first rate cut would be enacted at the June FOMC meeting. The very strong labor market data in March has made that a little less likely. However, the report did have some counterbalancing data that could be reassuring to the Federal Reserve. Average hourly earnings rose 0.3%, and are up 4.1% over the last year. This is slightly lower than January and shows moderate wage growth. 

 However, the election year does complicate matters. One school of thought is that the Fed will get at least one rate cut done, even if it decides to hold steady as the election gets underway. 

Chart of the Month: A Look at Fed Rate Cuts in Election Years

The Fed has usually held rates steady in election years over the last thirty years. Of note – the only two times the Fed cut rates was in 2008 during the Global Financial Crisis, and in 2020 during COVID. 

Source: Barron’s

Equity Markets in March

• The S&P 500 was up 3.10%
• The Dow Jones Industrial Average rose 2.08%
• The S&P MidCap 400 gained 5.39%
• The S&P SmallCap 600 was up 3.03%

Source: S&P Global. All performance as of March 31, 2023

All eleven sectors of the S&P 500 gained again in March, and for the quarter ten of eleven sectors posted gains. Energy was the top performer on the month, up 10.43% Last month’s winner, Consumer Discretionary, went to last place and was barely positive at 0.01% The index saw eight new closing highs for the month, and has achieved 22 year-to-date.  

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 4.21%, down from 4.26% the prior month. The 30-year U.S. Treasury ended March at 4.35%, down from 4.39%. The Bloomberg U.S. Aggregate Bond Index returned 0.92%. The Bloomberg Municipal Bond Index was flat at 0.0%. 

The Smart Investor

The first quarter is behind us. What should investors focus on? 

• Strong performance in the equity markets may mean that portfolio allocations have strayed from their original risk parameters. Tuning up your portfolio to ensure you are not taking excess risk can keep you calmer when volatility hits.
• Interest rates are likely to remain higher, and even if they do come down this year, it may not be as much as originally projected. Paying off high-interest debt remains a priority. 
• If you have set up 529 plans for education savings, the end of the school year is good time to review them. As your student gets closer to college, should you revise the risk parameters? If you haven’t set up 529 plan – there’s no better time to start, as  the SECURE 2.0 Act changes went into effect this year. 

Keeping your finances on track with your goals is something you don’t want to think about all the time, but focusing on it can ensure you create the flexibility you want throughout your financial journey. If you have questions, we’re always here to help.

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