Authored by :
Michael G. Dow, CAIA, CFA, CPA, Chief Investment Officer
Julien R. Frazzo, Director of Risk Management and Securities Research
* * *
The Quick Facts
- Nasdaq falls 13.2% in April, its worst monthly performance since October 2008
- S&P 500 loses 8.7%, its worst month since March 2020 at the onset of the Covid-19 pandemic
- Stock-bond return correlations apparent in April
- Inflation is uncomfortably high and inflation expectations are becoming unanchored
- The Federal Reserve (Fed) will be forced to aggressively tighten monetary policy
Stocks closed out a bleak month as investors had to digest many headwinds, from the Fed’s monetary tightening to rising rates, persistent inflation, Covid-19 lockdowns in China, and the ongoing war in Ukraine.
The Nasdaq fell 13.2% in April, its worst monthly performance since October 2008. The S&P 500 lost 8.7%, its worst month since March 2020 at the onset of the Covid-19 pandemic. The S&P 500 is now down 12.9% in 2022. The Nasdaq is off by 21.0% and is now in a bear market (as defined by a 20+% price fall from recent highs).
Stock-bond return correlations were apparent in April, reducing the ability of bond portfolios to hedge riskier assets. The U.S. Corporate Investment Grade, the U.S. Aggregate Bond and the Municipal bond indices were down 5.5%, 3.8% and 2.8% for the month, respectively. Inflation has yet to show signs of easing. A tight labor market, continued disruptions of the global supply chain, a fresh outbreak of COVID-19 in China, and a decrease in supply of energy and grain from Russia and Ukraine are all contributors.
On a total return basis, Consumer Staples was the only sector in the green on the month, finishing higher by 2.3%. Energy stocks slipped 1.7% but remained sharply higher for the year at 36.7%. On the other end of the spectrum, the Communication Services sector declined 14.1% in April, followed by Consumer Discretionary with -12.0% and Technology with -11.0%.
April Asset Class Performance
The broader markets were battered as Large Cap growth stocks fell 12.1%, the worst April on record since 2000, while Large Cap value, as measured by the Russell 1000 Value, “outperformed,” falling only 5.6%. The ESG segment of the market as measured by the MSCI USA ESG Select Index was down 8.4% in April, in line with the S&P 500. Over the last 3 years, the ESG index is up 52.3% and approximately 4.8% ahead of the S&P 500 on a total return basis. Dividend and low volatility strategies outperformed, signaling the market’s risk-off sentiment.
Outside of the U.S., the MSCI Emerging Markets Index posted a 5.6% loss in April. The MSCI EAFE (Europe, Australasia and the Far East) Index was down 6.4% in April, outperforming the U.S. Large Cap equity benchmark by 1.1% YTD.
Just as central banks on both sides of the Atlantic begin to raise interest rates to cool off inflation that looks more and more unanchored, growth is beginning to slow with the U.S. GDP falling unexpectedly in 1Q. The advanced estimate of GDP shrank at a seasonally adjusted annual rate of 1.4% in the January-March period while economists surveyed by Bloomberg had forecast a 1% rise.
U.S. Treasury bond yields rose across the curve from 2-year out to 10-year maturities in a “bear flattening” as inflation fears keep growing. Rates have been trending higher since October 2021, when the 2-year U.S. Treasury yield, a common market barometer of the Fed’s rate policy, broke higher from a Covid-period range. At the end of April, the 10-year Treasury yield was trading at 2.93% and the 2-year Treasury yield at 2.33%, a steep move from 0.73% at the beginning of the year.
The market is discounting the Fed pivoting from accommodative/emergency monetary policy (0% Fed funds plus quantitative easing) to neutral (2% to 3% Fed funds plus quantitative tightening). The Fed has indicated that U.S. rate hikes should accelerate, as the Fed needs to get to neutral quicker with the risk of inflation becoming unanchored increasing every day. If wage gains continue to accelerate and longer-term inflation expectations become unanchored, the Fed may have to pivot from neutral to tight, which would require a positive real Fed funds rate (i.e., Fed funds above the inflation rate).
The Fed is trying for an economic soft landing and the landing strip is becoming narrow for a positive outcome. Financial conditions are less accommodative as the Fed attempts to curb inflation by raising interest rates, thus increasing borrowing costs for businesses and consumers. Tightening too much or too quickly could push the economy into recession.
Outside of the Fed and geopolitical headwinds, April also saw the start of the 1Q 2022 earnings season. With difficult comps due to unusually high earnings growth in 1Q 2021, earnings growth rates are in the single digits for the first time since 4Q 2020. With almost 55% of S&P 500 companies having reported first-quarter earnings as of May 2nd, 80% reported positive earnings surprises, with an average beat of 3.4%. This is above the five-year average of 77% but below the five-year average beat of 8.9%. The performance of the equity market in 2021 was driven by earnings growth and is now dependent on elevated multiples and continued low rates. If interest rates rise in a disorderly fashion, markets may price increasing recession probabilities and a material re-rating of equity risk.
Stocks were not the worst-performing risk asset last month. The worst performance went to Bitcoin, which fell 16.2%, closely followed by Ethereum at -15.5%. The two most popular cryptocurrencies are now down 17.3% and 24.4% for the year, respectively. The Bloomberg Commodity Index advanced another 4.1% in April on top of 25.5% in 1Q 2022. Gold was down in March (-2.1%) but remains up 3.7% YTD. Oil price (West Texas Intermediate, or WTI) jumped 6.3% higher in April, settling at $103/bbl, and is up 78.9% year-on-year.
After a spike into the 30s with the Russian invasion of Ukraine in late February, volatility, as measured by the CBOE VIX Index, subsided to the low 20s for a few weeks before spiking up again. It closed at an elevated 33.4 at the end of April.
Chart of the Month – Annual Returns and Intra-year Declines
This chart shows the performance of the stock market (bars) and the intra-year decline (dots) each year. Markets (as represented by the S&P 500) have ended positive in 33 of the last 42 years (78% positive rate), and yet there was an average drawdown of 14% per year. Most years still end in positive territory, averaging 13% gains. Large double-digit drawdowns should be expected. We were due for a significant drawdown after 31%, 18% and 29% total returns in 2019, 2020 and 2021, respectively.
The stock market is not a one-way ride. But in the long run, investors have been rewarded. Volatility (and drawdowns) is the price investors pay to build wealth. Staying invested through the market’s ups and downs gives investors a better chance to reach their long-term goals.
Quote of the Month
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
– Benjamin Graham
Major Asset Class Dashboard
RELATED LINKS
Sign Up for Macro & Markets: An Update from Beacon Pointe’s CIO – May 19, 2022
Beacon ‘Pointe of View’ – A Market Update April 2022
Important Disclosure: This report is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. All investments involve risks, including the loss of principal. Investors should consult with their financial professional before making any investment decisions. Past performance is not a guarantee of future results.
© Beacon Pointe Advisors. All Rights Reserved.
