CWG Investment Committee: Volatility Picks Up in April

Stocks declined in April for the first month since October. The S&P 500 and Nasdaq pulled back 4.1% and 4.4%, respectively. However, it's important to note that both indices experienced a three-day losing streak at the end of the month leading up to the Fed’s May meeting and some important earnings reports.

Already in May the market has bounced back some. As of this writing, the S&P 500 and Nasdaq notched their best three-day streaks of 2024. There are many conflicting forces in the market right now. We expect volatility going into summer but for the bull market to continue as earnings have been solid and interest rate cuts will get closer with each passing month.

Overall, investor sentiment shifted in April from the bullishness seen earlier in the year. Last week the Fed left interest rates unchanged at their May meeting and their policy statement signaled a continued focus on combating inflation. This suggests future rate cuts remain a possibility, though the exact pace and number of cuts remain uncertain.

Wall Street's expectations regarding interest rates have shifted. Earlier optimism about potential rate cuts later in 2024 has softened. The bond market currently reflects a higher probability of just one, or even zero, rate cuts before the end of the year. This disconnect between the Fed's messaging and market expectations highlights the uncertainty surrounding the pace of future rate cuts.

As we have said many times in the past, the two main drivers of stock prices are earnings and interest rates. While the debate on interest rates movements will continue, a clearer picture of corporate performance is emerging as Q1 earnings season draws to a close.

By the end of this week 90% of S&P 500 companies will have reported their Q1 results. FactSet predicts earnings growth will land at 5% year-over-year for Q1 compared to expectations of 3.6%. The index is set to post its third straight quarter of year-over-year growth. Adding to stock price tailwinds, analysts are raising earnings estimates for Q2.

Valuations remain high in U.S. stocks. The S&P 500's forward P/E ratio currently sits at 20.0, exceeding both the five-year (19.1) and ten-year (17.8) averages, according to FactSet.

The performance disparity between large and small companies persists. The Russell 2000, which tracks smaller-cap stocks, continues to show negative earnings growth year-to-date. As anticipated, rising interest rates seem to be disproportionately impacting smaller businesses.

Political rhetoric regarding the economy is picking up as we get closer to the November presidential election. As investors our stance is simple: policy is what matters, not politics. 

While the political gamesmanship is what grabs headlines, policy is the real chessboard. As your family’s Personal CFO, we simply focus on the rules, develop a winning strategy, and move the pieces around to ensure you achieve your goals.

We will continue to monitor upcoming economic data releases and Fed pronouncements to refine our understanding of the monetary policy landscape. This will influence our investment decisions in the coming months.

We trust you are enjoying the warmer weather and planning for a fun summer.