“April is the cruellest month, breeding
Lilacs out of the dead land, mixing
Memory and desire, stirring
Dull roots with spring rain.”
— The Waste Land
T. S. Eliot called April the cruelest month because the month’s beautiful weather made the melancholy folk of the world feel that much worse. Same goes for investors, I suppose. While the warm weather and greening of the trees were welcome outside, the weather in the market was lousy indeed. Markets lost some of their luster in April, as fears of persistent inflation caused traders to rethink their expectations for lower interest rates.
Markets were lower across the board, with the S&P 500 down 4.1%, the NASDAQ down 4.4% and the Dow Jones down 4.9%, its worst performance since September 2022. The Dow is now barely positive on the year, though the other two major indices are still solidly up mid-single digits.
In their policy statement released today, Fed officials now point to a “lack of further progress” in taming inflation in recent months. To start the year, the markets were anticipating six rate cuts that would cumulatively bring short-term rates down to around 3.8%. As of today, markets are betting on one measly rate cut, with short-term rates remaining around 5% at the end of the year. At least for now, the Fed is not calling for any rate hikes, but all in, this is a fairly extraordinary change in expectations.
Among the various equity asset classes, small-cap growth was the hardest hit, with the Russell 2000 Growth Index down 7.6% for the month, which stands to reason. Smaller firms with loftier earnings expectations are more likely to see their fortunes changed by “higher for longer” interest rates than, say, a large company with more modest earnings growth expectations (the Russell 3000 was down just 4.4% for the month, and in a quirk, the Russell 3000 Growth Index and the Russell 3000 Value Index also turned in the exact same performance).
The Magnificent Seven, the vaunted group of mega-cap tech stocks responsible for the lion’s share of the S&P 500’s total return since January 2023, is no longer particularly Magnificent, or even Seven for that matter. Amazon, Microsoft and Meta were all negative for the month, and Apple (-11%) and Tesla (-26%) are decidedly negative for the year. Did Michigan trademark the Fab Five? Do the Beatles own the Fab Four? Somebody might want to look into those. These AI-related stocks have each appreciated markedly since the beginning of last year, but a change in market leadership is becoming harder to ignore.
We’re not really in the business of making bold market calls, and we won’t be making one here, but for investors who lean into value and away from pricey growth, this seems like an interesting set of circumstances. With the market still so top-heavy, this process of performance broadening could take some time.
Here’s hoping for darling buds of May.
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For more information, please reach out to:
Burke Koonce III
Investment Strategist
bkoonce@trustcompanyofthesouth.com
Daniel L. Tolomay, CFA
Chief Investment Officer
dtolomay@trustcompanyofthesouth.com
This communication is for informational purposes only and should not be used for any other purpose, as it does not constitute a recommendation or solicitation of the purchase or sale of any security or of any investment services. Some information referenced in this memo is generated by independent, third parties that are believed but not guaranteed to be reliable. Opinions expressed herein are subject to change without notice. These materials are not intended to be tax or legal advice, and readers are encouraged to consult with their own legal, tax, and investment advisors before implementing any financial strategy.
