Capital markets perspective: April showers

Capital markets perspective: April showers 


Stocks recently logged the worst results so far in 2024, as measured by the large cap S&P 500® Index, with the benchmark index down 3.05% the week ending Friday April 19. This was also the worst week for the S&P 500 since October 2023, when it was down 3.4%. Of note: The S&P 500 is still just 5.5% off its all-time high, and up over 20% in the last six months. 

With large-cap technology stocks dramatically selling off on April 19, the decline in the “Magnificent Seven” stocks knocked a collective $950 billion off their market capitalizations. Nvidia lost the most, shedding almost $300 billion in market capitalization.1

The bond market also produced a negative return with the Bloomberg U.S. Aggregate Bond Index down .67% last week and down over 3% year-to-date. The 10-year Treasury yield closed April 19 moderately lower at 4.62%. Additionally, the 2-year/10-year Treasury yield spread has been negative or inverted for a record 450 trading days, with an inverted yield curve considered a reliable recession indicator. In the past, an inverted yield curve has predicted recessions with almost unerring accuracy. The longer the curve remains inverted may result in an unexpected shock to the economy to restore the indicator’s status as a reliable recession gauge.2

Last week, as the U.S. bond market was hammered again, Federal Chair Jerome Powell signaled policymakers are in no rush to cut interest rates, and Treasury yields climbed to fresh 2024 highs as the Fed chair said it will likely take longer to have confidence on inflation — adding that it’s appropriate to give restrictive policy more time to work.3

Powell’s remarks represented a shift in his message after a third straight month in which a key measure of inflation, the Consumer Price Index (CPI), exceeded forecasts. He also signaled the Fed will likely stay on hold for longer than originally planned. Powell’s comments make it clear the Fed is now looking past June, with potentially two cuts or less this year.4 

Last week’s stock market downturn continued despite mixed earnings reports. On Monday, Goldman Sachs (GS) and Morgan Stanley (MS) reported solid earnings  – a bright spot to start a tough week for markets. United Airlines (UAL) beat consensus earnings estimates and rose over 20% last week due to air-travel demand and rise in passenger revenues. Netflix (NFLX) beat by a wide margin but announced they will no longer provide subscription data and lost nearly 10% for the week. Shipping company JB Hunt Transport Services (JBHT) was down over 7%, while rail shipping CSX Corporation (CSX), an American holding company focused on rail transportation and real estate in North America, exceeded earnings estimates. ASML Holding (ASML), the Dutch semiconductor manufacturer, missed earnings estimates and really spooked the semiconductor sector. Meanwhile, Taiwan Semiconductor Manufacturing (TSM), a major supplier to Nvidia and Apple, reported earnings that rose 8.9% from a year earlier and topped analysts’ expectations. 

From a macroeconomic perspective, U.S. retail sales data came in higher than expected, with a median forecast of .3% compared to actual sales much higher at .7% for the March period. Retail sales minus autos was higher than expected too, with the median forecast at .5% and the actual March data reporting 1.1%. The U.S. consumer remains strong and is fueling the U.S. economy. The first of two Fed regional manufacturing surveys was reported on Monday. The regional Empire State Manufacturing survey was weaker than expected at -14.3 with the median forecast at -10. However, this is stronger than the previous report of -20.9.   

In real estate happenings, new home construction posted the biggest drop in four years, despite America facing a housing shortage,5 starting 1.32 million versus an expected 1.48 million for March, and falling from 1.55 million home starts in February. New building permits were also slightly lower than expected in March, at 1.41 million versus an expected 1.51 million. These housing data points indicate an ongoing lack of inventory, constraining transactions. Builders play a significant role in the state of the housing market, both by developing new properties and changing the price point of homes they list for sale.

In workplace releases, initial jobless claims were in line with expectations. The second Fed regional survey of the week, the Philadelphia Fed Manufacturing Index, came in much higher than expected, at 15.5 versus expectations of just 2.5. 

What to watch this week 

This week is the busiest earnings week this quarter. Earnings will be front and center, with the “Magnificent Seven” kicking off reporting this week on Tuesday. Tuesday will also feature flash PMIs and new home sales, which will likely be interesting due to tight new inventory and last week’s slowdown in home building. 

Fed policymakers will not be commenting this week due to the required communications blackout period that surrounds the upcoming Federal Open Market Committee meeting. Analysts widely expect no change to the target fed funds rate.  

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