April 2024 Monthly Market Review

Following a five-month streak of gains, global equity markets experienced a downturn in April.  The S&P 500 and Russell 3000 Index each fell by more than 4%.  Large caps slightly outperformed small caps, and defensive sectors like utilities showed resilience.

The decline in equity values was largely due to a compression in the S&P 500’s forward earnings multiple.  Despite the downturn, corporate fundamentals remained robust with 77% of reporting companies beating estimates. Internationally, developed markets dipped, but emerging markets (EM), led by strong performance in China, recorded gains.  Fixed income markets saw a rise in yields, affecting bond prices, while real assets had mixed outcomes with natural resource sectors gaining amid higher natural gas prices and industrial metals benefiting from tariff hikes.

Overall, the month was marked by significant movements in both equity and fixed income markets, influenced by macroeconomic factors and shifting investor sentiment.

Global Equities

Domestic equity markets posted a drawdown in April following five months of gains.  The S&P 500 declined 4.1%, while the broader Russell 3000 Index fell 4.4%.  In a risk-off environment, large caps (−4.3%) outpaced small caps (−7.0%), while growth and value indices performed in line with one another (−4.4%).

Defensive utilities (+1.5%) and consumer staples (−1.2%) stocks were among the best performing sectors.  Energy (−1.0%) posted a modest decline, but continued to outpace the broad market due to a year-to-date (YTD) uptick in oil and gas prices. Real estate (−8.0%) was the worst performing sector due to higher yields.  IT (−5.6%), the best performing sector in the prior six months, also lagged.

The April sell-off was primarily driven by de-rating. The forward earnings multiple for the S&P 500 compressed from 21.0x to 19.8x.  Still, the multiple was above the benchmark’s 10-year average of 17.8x.  Corporate fundamentals remained solid.  Of the index constituents that reported earnings, 77% beat analyst estimates, and earnings growth for the calendar year was projected to come in at 10.8%.

Developed non-U.S. equity markets (−2.6%) also finished the month lower, but, despite weak returns, there were bright spots across the international space. The euro area exhibited signs of growth after a over a year of stagnation.  Euro area GDP expanded 0.3% in the first quarter, its sharpest increase since third quarter 2022.  The U.K. posted a 1.9% gain in April, on the back of cooling inflation and an improving housing market. Hong Kong (+5.2%) was among the best performing markets for the month, benefiting from a recovery in China.  Japan was an exception as it stumbled after a strong start to the year.  The yen remained under pressure, falling 3.8% vs. the U.S. dollar (USD), prompting speculation that the Bank of Japan intervened to help support the currency near month-end.  Currency movements in general remained a headwind, given continued strength of the greenback.  In local terms developed foreign equities generated a more modest loss of 0.9%.

Emerging markets (EM) equities (+0.4%) finished in positive territory and bested their developed markets counterparts.  China (+6.6%) was a key driver of performance, as positive momentum was supported by better than expected economic growth.  China’s GDP increased 5.3% in the first quarter, beating forecasts of 4.6% growth, driven primarily by exports and new energy capital expenditures.

While a strong start to the year, industrial production, retail sales, and the property sector data remain mixed, casting uncertainty around the sustainability of recovery without further government support.  Despite this uncertainty, lower valuations continued to attract foreign investors back into the market and helped push the Hang Seng Index, a measure of Hong Kong’s stock market, into technical bull market territory.  The Index rose 7.4% in April, bringing the total performance increase since its January 2024 low to 16.0%.  On the opposite end of the spectrum, Egypt (−11.9%) losses persisted, but decelerated amidst an ongoing debt crisis and geopolitical tension in the region.

After government reluctance to change the country’s currency regime, a key point of contention in previous International Monetary Fund (IMF) deals, it secured an $8 billion IMF bailout package after it allowed its currency to float and fall below 50 against the USD.  While Egypt’s decline is significant in absolute terms, it represents less than 1% of the MSCI EM Index, so the impact on broad market performance was muted.

Fixed Income

Inflation data for March 2024 was reported in April and—like the reports for January and February—inflation came in higher than expected.  Most concerning in the CPI report was what appeared to be a reacceleration in core services inflation.  As a result, markets continued to tamp down expectations for rate cuts in 2024.  By the end of April, markets were looking for one, or possibly two, rate cuts.

Yields rose modestly at the very front-end of the curve (3-6 months) and had an almost parallel move higher for maturities at the two-year and longer parts of the curve.  Two-year Treasuries increased 41 bps, to 5.0%, and 10-year Treasuries rose 48 bps, to 4.7%, leading to a very small amount of steepening across this part of the curve.  Five-year Treasuries rose 49 bps, to 4.7%, and 30-year Treasuries rose 45 bps, to 4.8%, causing a small degree of flattening across this part of the curve.  As a result, performance worsened along the curve:  T-bills rose 0.4% and outperformed the 0.4% decline in the 1-3 year maturity range, the 2.7% fall along the 5-10 year part of the curve, and the 6.1% decline at the long-end.

Corporate credit spreads fell with investment-grade falling 9 bps, to 87, and high yield dropping 11 bps, to 301.  However, tighter spreads were not enough to overcome the impact of rising rates and, as a result, investment-grade corporates fell 2.5% in April and high yield declined 0.9%; the only positive area within corporates occurred in bank loans, which rose 0.6%.  Securitized spreads were mixed, with declines in asset-backed securities (ABS) and commercial mortgage-backed securities (MBS) and a modest increase in agency MBS.

Duration played a big role in the month with shorter duration sectors like ABS (−0.6%) outperforming longer-duration sectors like commercial MBS (−1.8%) and agency MBS (−3.0%).

Real Assets

Real assets achieved mixed results in April, with real estate and other rate-sensitive sectors suffering losses, while multiple natural resource categories experienced gains.  Global REITs were down 6.0%, with U.S. REITs (−7.2%) underperforming, as yields on the 10-year Treasury rose above 4.7%, their highest levels since November.  There continued to be a flood of commercial real estate headlines.  This was mostly related to office distress and assets in other sectors, which were bought at peak prices and saddled with high levels of floating rate debt.

During the month, Trepp reported that CMBS delinquencies ticked higher, driven almost entirely by the office sector.  Rolling stress is expected to continue, creating a potentially target-rich environment for private real estate managers as they look to acquire quality assets which have stressed balance sheets.  Clean energy fell 5.0% on dampened expectations for near-term rate cuts, and is down 14.9% YTD.  Infrastructure was down 0.5%.

Brent crude fell sharply at month-end on reports of increasing inventories, and finished the month down 0.8%.  Despite the monthly losses, Brent prices were up 12.1% YTD.  Natural gas was up 29.2%, with most of the gains coming late in the month, as the EPA proposed new rules that would effectively force existing coal-powered plants to retire by 2039, unless they adhere to carbon-capture requirements.  These restrictions would also apply to newly constructed, but not existing, natural gas-powered plants.  Natural resource equities fell 0.7%.

Commodities rose 2.7%, buoyed by the industrial metals subindex (+13.9%), as President Biden called to more than triple tariffs on Chinese steel and aluminum, from 7% to 25%.  The precious metals subindex (+4.1%) also outperformed, with gold prices rising 3.3% on geopolitical uncertainty, including this year’s election, as well as strong demand from central banks.  Metals and mining equities  (+3.4%) increased on rising commodity prices. ⬛

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