Market Commentary

May started out under pressure after April broke five straight months of market gains. All indices and sectors finished April in the red. Real Estate was the hardest hit at -7.6%, Technology slid -6.2%, Healthcare dropped -5.6%, and Materials retreated -5.0%. Faring a bit better were Energy, down only -1%, Consumer Staples at -1.1%, and Utilities fell -1.6%. April evidenced stronger than expected job growth, labor participation and related costs which created market anxiety. April ended with hints that the Fed would be accommodative, but not anytime soon.

S&P 500:                     April -4.16%            YTD +5.57%

DOW:                           April -5.00%            YTD +0.34%

NASDAQ:                   April -4.41%            YTD +4.31%

Russell 2000:           April -6.59%            YTD -2.23%

Sector Performance YTD:

Communication Services +13.0%

Consumer Discretionary +0.2%

Consumer Staples +5.7%

Energy +11.7%

Financials +7.1%

Healthcare +2.8%

Industrials +6.6%

Technology +6.3%

Materials +3.4%

Real Estate -9.0%

Utilities +5.2%

Current U.S. Treasury Yields:

6 Month Bill                          5.35%

2 Year Note                          4.84%

5 Year Note                          4.50%

10 Year Note                        4.49%

30 Year Note                        4.63%

The Fed and the Economy:

Growing 1.5% in April were China’s exports, while imports rose 8.4%, showing a pickup in demand. Both had declines in March. China is looking for growth to hit 5% for 2024 but will need more policy assistance to do so with their uneven economic recovery. Japan’s economic weakness is increasing, as evidenced by the yen hitting a low of 155 to the dollar not seen in decades. Core inflation is now at 2.6% and Japan is also running a budget deficit of 6.5% of GDP.

The Bank of England may start cutting rates as soon as June, stating that inflation is moving in the right direction in the UK. They believe their recession has ended and are on pace to hit their 2% target and perhaps go lower within the next couple of years. The Eurozone had its best performance since Q3 2022 and has bounced back from its recession. Growth hit 0.3% vs 0.2% expected. Core inflation decreased to 2.7% from 2.9%. Germany and France both posted 0.2%. Rate cuts are now on the agenda.

U.S. GDP increased 1.6% in Q1 2024. Total employment rose 175,000 in April, below the 240,000 estimated, and the unemployment rate bumped up to 3.9% from the March 3.8% print. Existing home sales retreated 4.3% in March and 3.7% for 12 months. Consumer confidence waned in April for the third consecutive month. The index came in at 97.0 vs 103.1 in March.

Fed Chair Jerome Powell continues to be data driven and held rates steady at last week’s meeting. Powell noted that the Fed’s current policy stance is working and stated the next move in rates would be to cut. Inflation, while still elevated, is trending in the right direction. We believe rates will stay as is for the foreseeable future. The market has absorbed the news of less rate cuts for 2024.

Looking Forward:

The tone that prevailed in April was a continuation of a nervous marketplace that was dip buying during repeated selloffs. Corporate earnings with outsized hits and disappointments spread through all sectors. Frankly, the markets were due for a breather and a pullback.

Earnings for the first quarter are winding down with 80% of S&P 500 companies having reported. 77% have surprised positively on EPS (earnings-per-share) and 61% on revenue. Q1 earnings growth year-over-year is clocking in at 5%, the highest since Q2 2022. Margin expansion has been the theme, as well as easier comparisons. Misses, as usual, have been beaten up to the downside. Forward guidance has been balanced between negative/positive on EPS.

May has rebounded from April’s pullback. We believe there will continue to be more day-to-day market chop, but the trend is up. Money Market Funds are currently sitting on $5.8 trillion and paying roughly 5%. Knowing rate cuts are eventually coming, that cash will be allocated to equities, and to a lesser extent, U.S. Treasuries. Staying long the market will be rewarding for the balance of the year. Pullbacks give investors a chance to add to positions and initiate new ones. We are encouraged by the Fed commentary and market action.