April Market Overview

Equity markets continued to reach new highs in April; many major indexes were up over 5% for the month, with Large Caps and Growth leading the way. This marks a reversal from prior months, where Small Caps and Value had been leading, which we believe is attributable to a change in investors’ viewpoints on inflation and interest rates, as discussed in greater detail below. Nevertheless, even April’s laggard – Small Cap Value – rose 2% for the month and, of the equity indexes we track, remains the leader YTD.

Contributing to the continued rise, corporations began reporting first quarter financial results that were broadly ahead of investor expectations. In fact, as of this writing, over 300 of the S&P 500 companies have reported first quarter results, of which a remarkable 88% beat consensus earnings estimates.

Key economic datapoints also continue to validate the strength of the recovery, such as first quarter GDP data, which shows the U.S. economy grew by a healthy 6.4% in the first quarter. The strength is seen in manufacturing and services data as well, with the ISM manufacturing index at 60.7 in April and the ISM services index reaching an all-time high of 63.7 in March (the most recently available data).

In April, consumer confidence reached a new post-pandemic high of 121.7, presumably aided in large part by continued stimulus payments. In fact, the Commerce Department recently released U.S. personal income data for March, which climbed a notable 21% from February levels on account of the continued stimulus payments and additional unemployment benefits. We remain optimistic on the U.S. consumer given the combination of high confidence levels, pent up demand, and elevated savings.

Investors also remain optimistic at the prospects for large government spending bills that aim to support many facets of the U.S. economy, such as infrastructure, clean energy, research and development, as well as low and middle-income families with funding for preschools, child care, and college. Of course, these plans come with proposals to increase taxes on corporates and upper-income families, which will presumably create some counterforces in the markets as details become clearer.

The discussion of the government’s continued spending spree has also contributed to the debate surrounding inflation. For March, the most recent datapoint available, inflation reached 2.6%, up from 1.7% in February, though roughly in line with economists’ projections. The fact that inflation is climbing now is no surprise given the global economy had come to a screeching halt at this time last year and demand had evaporated overnight, causing a natural reduction in prices for many things ranging from commodities to airfares. Where inflation is headed longer-term is more debatable, though investors appeared to temper their expectations throughout April. For what it’s worth, the Federal Reserve continues to maintain its stance on inflation, targeting an average of 2% over time, and showing no indications that current inflation numbers will cause it to start hiking rates. In fact, the Fed has been very clear that it must see further employment gains before it becomes more hawkish.

Alongside investors’ more tempered views of inflation came an easing of the upward pressure on interest rates: the 10-year Treasury fell from 1.74% at the end of March to 1.65% by the end of April. The easing of interest rates over the course of the month allowed most Fixed Income benchmarks to generate modestly positive returns, though we remind readers that rates are still considerably higher from the beginning of the year, and YTD Fixed Income returns remain negative.

As first quarter earnings results wrap up in coming weeks, we believe investors will focus predominately on developments with U.S. spending bills, the reopening of the economy, and getting everyone vaccinated. We maintain our optimistic view, and we believe that should volatility present itself, it would be short-lived and should not distract investors from what is proving to be a remarkable economic rebound.

The monthly Market Overview is written by two members of MACRO’s Investment Committee: Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.


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