Financial Market Roundup
Produced by Fifth Third's Investment Management Group
In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of April.
The global economy continues to experience an economic slowdown in response to the pressures spurred by the disruptions from Russia’s invasion of Ukraine, high inflation, geopolitical uncertainties domestically and abroad, recent bank failures, and increasingly restrictive monetary policy from the United States and the Eurozone’s central banks. Global banking stresses, inflation in many developed nations, and growth concerns have kept investors on edge.
Geopolitical turmoil, lingering COVID-19 economic restrictions, supply chain bottlenecks, restrictive central bank policy actions, and inflation measures are topics that the Investment Management Group is monitoring.
The Federal Open Market Committee (FOMC) last met on March 22nd when they increased rates by 25 basis points, leaving the Fed Funds target to a range of 4.75%-5.00%. Fed Chair Jerome Powell noted that the “…committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2.0% over time.” As of the end of April, markets are expecting one additional 25 basis point increase for 2023 coming when the FOMC meets in early May.
The European Central Bank (ECB) last met in March and increased rates by 50 basis points. In their subsequent press release it was noted the increase was done “… to ensure the timely return of inflation to the 2.0% medium-term target.” As of the end of April, Markets are also expecting another 25 basis point increase when the ECB meets again, with additional hikes in the second half of 2023.
Global equities were mainly higher in April. Domestically, smaller market cap indexes fell as did the more cyclical sectors of the S&P 500, although the S&P 500 index was higher for the month.
2023 Q1 Earnings season is well underway, with just over half of the S&P 500 reporting their results as of the end of April. In aggregate, the S&P 500 results have been stronger than expectations with around 80% of companies who have reported noting Q1 earnings through their target estimates, a ratio well above the prior quarter.
The S&P 500 Index rose by 1.6% in April. The blue-chip Dow Jones Industrial Average rose by 2.6%. The tech heavy NASDAQ Composite rose by 0.1%. International stocks were mixed with the MSCI All Country World Index of developing and developed market stocks up by 1.5% in April. The MSCI Emerging Market Index fell by 1.1% in April. The MSCI EAFE Index of developed international equities was up by 2.8% in April.
On April 27th, the GDP report for Q1 of 2023 came out detailing quarter-over-quarter economic expansion of 1.1%, below market estimates of 1.9%. The miss was largely due to contraction in private inventories and residential fixed investment, although was offset by consumer spending and positive net exports.
In March, the Fed released its Summary of Economic Projections which details the central banks outlook on a variety of prospective economic measures. Specifically, investors digested worsening projections for expected inflation, and a slight drop in expected GDP despite positive Q3 & Q4 2022 GDP figures of 2.6% and 3.5%.
Following a month with historic volatility in U.S. Treasury rates, April saw a return to more normal levels of volatility across the U.S. Treasury curve. During the month most term points on the U.S. Treasury curve moved slightly lower. At April month-end, the U.S. Treasury 2-year yield fell to 4.01% with the 10-year falling to 3.42%. The results of these changes netted a slightly more inverted curve with the 2/10 inversion expanding to 58 basis points.
Mortgage Rates moved higher in April as the Freddie Mac 30-year Primary Mortgage Market Survey rose to 6.43% on April 27th up 11 basis points from March 30th.
On April 26th, the US House of Representatives passed Speaker Kevin McCarthy’s new debt ceiling bill, which allows for increasing the deficit by $1.5 trillion. Although the bill passing is a promising start to the resolution of the current debt ceiling, some of the previsions of the bill will likely be challenged in the Senate. Following the House passing the bill, Senate majority leader Chuck Schumer said passing the bill as its currently constructed was a “wasted effort” leading many to believe that there will be more back-and-forth over the coming months on this issue.
Following the failure of two large domestic banks, and the creation of the new Fed Bank Term Funding Program, on March 13th President Biden released a statement noting that “Americans can have confidence that the banking system is safe. Your deposits will be there when you need them.”
The March CPI report detailed year-over-year inflation at 5.0% well above target levels but below last month’s 6.0%, and below market expectations of 5.1%. The Q1 GDP report came in at 1.1% and detailed an expanding US economy, although below market expectations. The GDP report specifically detailed that personal consumption trends remain strong, even in the face of economic and geopolitical headwinds.
However, the recent stresses on the global financial system, persistent inflation domestically and abroad, and geopolitical tensions are weighing on investor sentiment. On balance, the head-and-tail winds currently at play suggest there is a potential path for global economic growth, albeit at a much slower than initially expected pace.