Topline
Stocks closed out April with a whimper Tuesday, as indexes limped to easily their worst month of 2024 as hopes dwindled for a monetary policy elixir to bolster equity valuations.
April showers were heavy for investors as the Dow’s more than 1,500-point decline was by far the ... [+]
Key Facts
The Dow Jones Industrial Average, S&P 500 and tech-heavy Nasdaq all declined more than 1.4% apiece by early afternoon Tuesday as a fresh batch of earnings rolled in.
On the last day of the month, the Dow’s April loss extended to 5%, or 1,990 points, the S&P’s decline to 4% and the Nasdaq’s drop to 4%.
It’s the bellwether Dow’s worst point loss in a month since September 2022 and the S&P’s and Nasdaq’s worst monthly percentage returns since September 2023.
The April selloff, which also coincided with a mixed bag of first-quarter earnings, largely came as market expectations recalibrated for the interest rate cuts long yearned for by equity investors.
The implied probability of three or more rate cuts by year’s end sank from 66% to 7% over the course of April, according to CME FedWatch Tool, while Treasury yields of varying maturities rose to their highest levels of 2024, with 2-year and 10-year U.S. government bond yields shooting up more than 30 basis points apiece this month.
Key Background
The shift in monetary policy expectations followed inflation data that came in hotter than expected, as the Federal Reserve began hiking rates two years ago to rein in the most painful consumer price increases in more than 40 years. Higher bond yields and higher interest rates—yields typically follow longer-term expectations for interest rates—weigh on equities as higher borrowing costs cut into earnings due to higher interest expenses on the debt financing companies use to finance operations, as well as the typically dampened consumer activity as personal loans similarly grow more costly.
Contra
Stocks remain up this year, with the Dow up 0.3% and the S&P and Nasdaq up 6% each. Most notably, the stocks remain up significantly from their October 2022 lows when recession fears crested, with the S&P returning over 30% over the last 18 months.
Crucial Quote
Even as bond yields grow more enticing for investors, stock indexes remain close to their all-time highs achieved in March. This is because “equities don’t need Fed rate cuts for the rally to continue, all they need is solid earnings growth,” according to Kristy Akullian, head of BlackRock’s iShares exchange-traded funds Americas investment strategy. “It’s not that rate cuts no longer impact equity valuations; it’s that robust earnings growth, particularly in the technology sector, has more than compensated equity investors for a higher discount rate,” Akullian explained.
What To Watch For
The Fed will announce the results of its policy-setting committee’s two-day meeting Wednesday afternoon, providing some fireworks on the first day of May. Though a wide majority of economists expect the target federal funds rate to hold steady at 5.25% to 5.5%, markets typically react sharply to the indicated future direction of policy, perhaps providing an inkling if the April showers will bring May flowers for investors.
Further Reading
