Welcome to April and Q2 2024. Let’s look back at the past two weeks and catch-up on things!

Strong Start to the Year

Let’s not dive into the second quarter without first revisiting how exceptional the past three months have been for investors. The S&P 500 (a popular index for the US equity market) rose 10.56% in Q1. This follows very strong returns in 2023. AI trends propelled many parts of the market higher but it’s important to note that the breadth of this rally expanded meaningfully in the quarter with sectors like energy and financials posting double-digits returns.

Rates March Higher

The first quarter was not as kind to fixed income investors. Interest rates have continued to trend higher as the Federal Reserve has yet to cut rates – and is giving mixed signals to markets as to when (or if) they will cut in 2024. More on this below.

Inflation Data

One thing you can count on – there will always be an inflation report to review! Since our last post on March 22nd, there have been four major releases. Three of the four showed improving inflation trends:

1. February Core PCE month-over-month: This is the Fed’s preferred inflation metric. It surprised on the downside, rising 0.26%. The largest component was once again housing (0.08%)
2. University of Michigan inflation expectations: This popular survey obtains consumers expectations of inflation. The measure fell in the month
3. France March Core CPI: other countries are battling inflation too. France’s latest report also showed declining inflation

The fourth report, March Institute of Supply Management (ISM) manufacturing prices paid index (a measure of business sentiment of inflation), was the one to buck the trend. The reading came in higher than expected, leading markets to once again worry about ongoing inflation strength. Its release on the first day of Q2 2024 started a small sell-off (as rates rose and expectations of a June cut fell).

There were also two releases in the middle of this week regarding services inflation (Global Services and ISM Services). Much like 3 of the 4 reports above, these were “dovish” – meaning they supported falling inflation and possible rate cuts as they should evidence of falling prices/cooling inflationary pressures.

Why does inflation still get so much air time? Its path, as well as the path of labor markets, are the two responsibilities of the Federal Reserve (known collectively as their dual mandate). Before interest rates can be lowered, the Fed needs to be confident that inflation is under control and that labor markets remain strong.

Fed Speak

Members of the Federal Reserve have been taking interviews in recent days. Chair Powell spoke this week, sticking to the party line of “we do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2 percent.” A day later, Federal Reserve Bank on MN president Neel Kashkari noted there could be no cuts this year – which caused markets to fall meaningfully into the close.

It’s hard not to react too much to these comments (whether they are hawkish or dovish) – but that is exactly what you need to do. Keep in mind – the Federal Reserve doesn’t want to front run itself. If they came out strongly hinting at a June cut now, we very well could see a reaction that would prove to be inflationary. In my view, they are walking a very fine line and the data should be analyzed – not their prepared remarks.

Taxing Times

There is some interesting data showing that during an April that follows a strong market-return year (such as the one we had in 2023), there is notable selling pressure leading up to tax day. It’s assumed that this may be due to the need to raise cash to pay tax bills resulting from capital gains in the prior year that become due in April. If the trend holds, this weakness should be short-lived (but as always, history may not repeat!)

Key Data on this Horizon

By the time you read this, we will know the results of March’s jobs report (released on April 5th, 2024). This report, along with March’s Consumer Price Index report (released April 10th, 2024), will be the next data points that markets – and the Federal Reserve – are watching closely.

The quarter is certainly off to an exciting start and we are just a few days in – at least it’s comforting to know we are all in this together!

Onward we go,