CWG Investment Committee: April Ends With a Small Lift to Markets

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We delayed our monthly letter since the Fed was scheduled to meet today. As expected, they announced a 0.25% rate increase. The next meeting is scheduled for June 15th. The market will likely focus on whether the Fed will pause in June and the likelihood of future rate cuts this year.

The stock market and economy have remained resilient so far in 2023 despite mounting pessimism from analysts and economists. The S&P 500 rose 1.5% in April. The Dow added 2.5% while the Nasdaq managed a slight 0.1% gain. Through the first four months of the year, the S&P 500 is up 8.6%.

The market’s resolve will be tested in the coming months. The Fed joined the chorus of pundits in predicting a recession will start at some point this year. While a recession appears to be on the horizon, “if” or “when” a downturn occurs remains the two most common questions on Wall Street right now.  

Q1 GDP of 1.1% showed the economy is still growing. While that number fell short of economists’ expectations, the report showed that consumer spending had picked up to its best level in seven quarters. This was a celebrated datapoint by investors as consumer spending drives the U.S. economy, accounting for roughly two-thirds of GDP.

Q1 Earnings season is, so far, another positive datapoint thrown into the mixed bag of economic indicators we are monitoring. Most large companies, 79%, have beaten expectations, according to FactSet. Those expectations were a low-bar due to macro concerns. Nonetheless, companies are not doing as badly as previously believed.

Forward 12-month P/E ratio is currently 18.1x. The historical average is around 16x while the five-year average is 18.5x, according to FactSet. So, valuations are still high, but well below last year’s peak of 22x.

The warning signs of a possible slowdown are mounting.

Residential housing sales have slowed but not collapsed despite higher prices and higher mortgage rates having increased dramatically in the past three years.

April ISM Manufacturing was 47.7%. A reading under 50 indicates contraction.

The WTI oil price is -4.3% this year even as OPEC plus cut daily production by 500,000 barrels last month. This signals that demand is decreasing.

As written in last month’s letter, the breadth of the headline market gains is very narrow. Five stocks, Apple, Microsoft, Meta, Nvidia, and Amazon account for 60% of the S&P 500 gains. This is usually a bearish signal. The Russell 2000 was up 0.4% through April as the broad list of stocks languished.

Investors seem to have grave concerns over commercial real estate prices which weigh heavily on regional bank balance sheets. This is a potential negative catalyst for broad markets that we will be monitoring as the year goes on.

The yield curve remains heavily inverted, signaling that the bond market believes the economy will falter, forcing the Fed to cut rates before the end of the year. 

Current yield curve is inverted. Source: Bloomberg &

The good news is that we have high short-term yields adding to your performance and new products such as buffer fund ETF ‘s providing upside participation with downside protection. 

We hope you are enjoying your spring and making summer plans with friends and family.