Market Review
The S&P 500® falls below its 50-day moving average for the first time since November
Global markets pulled back in April as inflation reaccelerated, leading consensus to expect “higher-for-longer” monetary policy. The MSCI All Country World Index delivered its first negative return since October 2023. From a geographic standpoint, domestic equities lagged their global counterparts, especially emerging markets (EM). In fact, EM outperformed the S&P 500 by the largest differential since November 2022.
Economic data mostly came in stronger than expected during the month, driving long-term interest rates higher and the Bloomberg U.S. Aggregate Index lower. The index has now been down three out of four months this year. Given the Federal Reserve (Fed) has maintained the same policy rate since July 2023, the 10-year/2-year U.S. Treasury yield curve has been inverted for a record 22 months, acting as a headwind for the Financials and Real Estate sectors.
Theme of the Month
Don’t fight the Fed
Of the many investment adages, including “sell in May and go away” and “this time is different,” the one that is most relevant to the current environment is “don’t fight the Fed.” The expression implies that while investors may disagree with monetary policy actions, no one has more market influence than the Fed, so investors ought to adjust their expectations accordingly. To better understand April’s equity market pullback, let’s take a step back and remember how we got to the current market vs. Fed dynamic.
Since late last year, Fed officials have acknowledged inflation was moving in the right direction, and consequently, it would likely become appropriate to discuss cutting policy rates soon. As investors began to expect monetary policy easing, views toward companies that faced challenges from elevated inflation and high interest rates turned more positive. In fact, from its October 2023 low through the end of March, the Russell 3000® jumped 24%, led higher by small- and mid-cap stocks that had previously lagged large-cap growth throughout much of 2023. Furthermore, financial conditions — a broad measure of various financial market indicators — eased, and by March, had returned to levels not seen since the near-zero policy rate period of 2021. From a factor perspective, value and leverage were the two strongest performers during this period.
While the Fed made many attempts at tempering the market’s enthusiasm during this period, investors continued to believe significant rate cuts were imminent. In October 2023, for example, investors expected two 25 basis point rate cuts in 2024, yet by mid-January, investors were pricing in at least six rate cuts! Policy changes of that size and speed would normally be indicative of a sharp recession. While expectations cooled in the following months, market pricing still implied three to four cuts as recently as early April — defying the Fed’s persistent messaging — allowing financial conditions to remain easy. Leading up to April, the strong market rally underlined the notion that markets were attempting to “fight the Fed” in the hope that monetary policy would begin to loosen.
By mid-April, however, the market’s hopes appeared dashed, as the S&P 500 fell below its 50-day moving average for the first time since November (Figure 1). Additionally, the 10-year U.S. Treasury yield increased throughout the month, reaching the highest levels since November as well.
Figure 1. S&P 500 Price Level
The S&P 500 fell below its 50-day moving average in April as inflation accelerated
Source: As of 4/30/2024. Source: Bloomberg L.P.
View accessible version of this chart.
So, what changed in April? Inflation data began to reaccelerate. Early in the month, the Consumer Price Index (CPI) came in above consensus expectations, growing 3.5% on a year-over-year basis, the highest level since September. Not surprisingly, the fall in both equity and fixed income prices took hold alongside a string of strong economic data — retail sales, industrial production and durable goods orders — that indicated the CPI report might not be a one-off event and that rather, inflation might remain quite sticky.
As inflation reports kept proving stronger than expected, Fed officials consistently reminded investors of the Fed’s patient and data-dependent approach to monetary policy. Ultimately, the market’s hopes for rate cuts caught up with reality, and previous expectations for multiple rate cuts in 2024 evaporated to just one (Figure 2). Areas of the market that had previously benefited from easing financial conditions, such as the small-cap stocks that comprise the Russell 2000®, experienced their worst monthly performance since 2022, during April.
Figure 2. Consensus Rate Cut Expectations in 2024
The market attempts to “fight the Fed” with hopes for more rate cuts in 2024
Source: As of 4/30/2024. Source: Bloomberg L.P.
View accessible version of this chart.
It has been more than three years since CPI crossed above the Fed’s 2% target, during which time the path of inflation and corresponding monetary policy response has been a key market driver. Until the market achieves a better line of sight to 2% inflation, we expect this dynamic to continue. Our business cycle analysis will continue to focus on leading indicators of inflation, such as PMI® surveys, as well as lagging indicators, such as employment, and look for any weakness that would lead to falling inflation. In the meantime, we expect the headwinds that investors have faced over the past year to remain intact.
Given the ongoing higher-for-longer narrative, in our view, asset allocations should remain broadly diversified and emphasize U.S. equities with a focus on quality stocks given their tendency toward consistent earnings growth and strong balance sheets. Within fixed income, allocations should rely less on below-investment-grade credit as core fixed income valuations remain attractive.
For more information, please contact your PNC advisor.
Figure 1: S&P 50 Price Level
The S&P 500 fell below its 50-day moving average in April as inflation accelerated (view image)
Date |
S&P 500 Price |
50-day Moving Average |
4/30/2021 |
4181.17 |
4002.74 |
8/31/2021 |
4522.68 |
4390.92 |
12/31/2021 |
4766.18 |
4656.99 |
4/29/2022 |
4131.93 |
4382.63 |
8/31/2022 |
3955 |
4013.5 |
12/30/2022 |
3839.5 |
3898.26 |
4/28/2023 |
4169.48 |
4033.55 |
8/31/2023 |
4507.66 |
4466.84 |
12/29/2023 |
4769.83 |
4502.62 |
4/30/2024 |
5035.69 |
5126.66 |
Source: As of 4/30/2024. Source: Bloomberg L.P.
Figure 2: Consensus Rate Cut Expectations in 2024
The market attempts to “fight the Fed” with hopes for more rate cuts in 2024 (view image)
Date |
Expected Number of 25bps Rate Cuts in 2024 |
1/1/2024 |
5.685 |
1/31/2024 |
5.825 |
2/1/2024 |
5.826 |
2/29/2024 |
3.399 |
3/1/2024 |
3.663 |
3/29/2024 |
2.68 |
4/1/2024 |
2.682 |
4/30/2024 |
1.131 |
Source: As of 4/30/2024. Source: Bloomberg L.P.
