April was a challenging month for global stock markets. The S&P 500 fell -8.7%, lowering the year-to-date return to -12.9%. The negative effects of high inflation, muddled supply chains and global conflict have persisted throughout most 2022.
Inflation remained high during the month, with the U.S. Bureau of Labor Statistics (BLS) showing an annual rise in consumer prices of 8.5% through the end of March. Supply chain challenges due to COVID-19 lockdowns in China, and the impact on commodity prices from the Russia-Ukraine war have continued to push consumer prices to higher-than-expected levels. As a result, the U.S. Federal Reserve will likely be more aggressively raising interest rates in the near future in an attempt to slow consumer demand and reduce inflation.
Riskier areas of the stock market have suffered as a result of the Federal Reserve’s attempts to slow the economy. The Technology, Communication Services and Consumer Discretionary sectors all experienced outsized benefits from the Federal Reserve’s historically low interest rate policy during the aftermath of COVID. Those sectors are experiencing the reverse effect with rates rising, and all fell more than -10% in April. Representatives from these areas are high-growth, high-valuation names including Netflix, Amazon, and Tesla.
Conversely, areas of the stock market that performed well during April tended to trade at reasonable valuations, maintain high-quality balance sheets, and generate consistent cash flow for paying dividends and buying back shares. Many Consumer Staples and Real Estate companies fall into this category, and both sectors meaningfully outperformed the S&P 500 during April.
In the fixed income markets, investors are weathering one of the most trying periods in market history. Bond yields have rapidly increased in anticipation of the Federal Reserve raising interest rates to fight inflation. Rising yields cause the value of existing bonds to move down, and as a result, most bond investments are experiencing a historically unpleasant year. The Barcap Intermediate Government/Credit Index is down -6.4% year-to-date.
While stock and bond markets are currently enduring a challenging period, there are some positive signs beginning to emerge:
- Inflation (U.S. BLS CPI) is expected to peak near the current 8.5% rate this spring, before slowing to a more reasonable 4% annualized paced in the fourth quarter of 2022 (Factset Research).
- Fixed Income investors are finally seeing meaningful bond yields. Two years ago, during the depth of the COVID-19 crisis, the yield on the 10-year U.S. Treasury was approximately 0.75%. Today, that same bond is yielding close to 3.0% (CNBC).
- Stock market valuations have dropped to a normalized level. The forward price-to-earnings multiple on the S&P 500 climbed to 23x two years ago at the peak of government stimulus policy. That valuation has since dropped to 17x earnings, which is in-line with its 10-year historic average (Factset Research).
Over the next few months, we expect volatility to remain high. The Federal Reserve will likely continue to raise interest rates at an aggressive pace. Their goal is to tame inflation, and any sign that inflation is subsiding will be met positively by both stock and bond investors. Volatility and uncertainty are a constant in markets, and we will continue to maintain our disciplined approach and invest in high-quality, large capitalization stocks with above-average dividend growth, relative valuation, and consistent earnings growth.
Please do not hesitate to contact us at any time to schedule a review of your portfolio and/or financial plan.