Key Points:
- Stocks suffered their worst month in two years as the S&P500 dropped 8.72% in April
- The technology heavy NASDAQ Composite Index has fallen 21% this year with big tech companies that drove the market higher in recent years faring worst
- Higher expected interest rates caused a bond market selloff as the Federal Reserve attempts to combat high inflation in the US
Stocks suffered their worst month since the COVID shutdowns of May of 2020, as the S&P500 dropped 8.72% in April. Markets digested a negative GDP reading in Q1, along with high inflation, lockdowns in China, high energy prices impacting consumers and the ongoing Russia-Ukraine conflict that does not seem to have a clear resolution. U.S. Gross Domestic Product (a measure of how the economy is growing) contracted in the first quarter at a 1.4% annualized rate. This caused investors concern that the US economy may be headed for a recession. However, looking back to 2021, US GDP advanced a staggering 6.9% (annualized) in Q4. GDP should stabilize in the coming quarters but the odds of a recession (2 consecutive quarters of negative GDP growth) for 2022 remain low but are probably higher than the start of the year.
Most sectors of the market were lower with communication services (-15.62%), consumer discretionary (-13.00%) and technology stocks (-11.28%) leading the market down. Consumer staples (+2.56%) was the only positive sector as the demand for paper towels, toothpaste and food products tend to remain stable regardless of problems abroad. The NADAQ Composite is down 21% for the year as shares of big technology companies that drove the market higher over the past few years experienced double-digit losses. Value stocks continue to outperform growth stocks for the year, while small cap stocks are lagging larger companies. That is typical in a risk-off environment. International stocks held up better during April in both emerging and developed markets despite a strengthening U.S. dollar.
All eyes will be on the Federal Reserve in the coming months as bond investors expect a 50-75 basis point increase in May in an effort to slow rising inflation. This will be the largest hike since May of 2000. In addition to an increase in the Federal Funds Rate, it is expected that the Fed will allow their balance sheet to runoff about $95B per month. When the economy closed due to COVID, the Fed aggressively bought bonds (Treasuries and mortgages) to provide liquidity in the markets and to ease financial conditions (lower interest rates) for consumers and businesses. As interest and principal on these bonds comes due, they will no longer be reinvesting them in the market but slowly pulling liquidity out of the system. The market has anticipated these moves which is why yields have moved markedly higher before the Fed even started. The move in yields has caused the Bloomberg Aggregate Bond Index to drop 9.5% for the year, as higher current yields hurt existing bonds. If inflation readings start to come down, volatility in yields will likely follow suit. Higher quality corporate bonds underperformed high yield bonds suggesting the economy is still strong. Defaults remain below historical averages and income is coming back to the fixed income component of balanced portfolios.
Sources: Morningstar Direct, Bloomberg, Wall Street Journal, JPMorgan