Key takeaways
Stocks suffered a setback in April, retreating from all-time market highs in March.
Investors remain closely focused on the timing of potential Federal Reserve interest rate cuts.
Slower than expected April jobs market growth again fueled speculation that the Fed could start cutting interest rates before the end of the year.
The stock market continues to exhibit volatility in an environment where market leadership is shifting. Stocks retreated in April, ending a streak of six consecutive months of positive performance. The S&P 500 achieved new all-time highs in March, but experienced significant ups-and-downs in April, ending the month with a loss exceeding 4%. Ten of 11 S&P 500 sectors produced negative total returns in April. Only utilities stocks managed a modest gain.1
“Investors are trying to determine if the market has fully priced in reduced expectations for Federal Reserve (Fed) interest rate cuts,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Dating back to late 2023 and including the first three months of 2024, markets seemed to anticipate that rate cuts were imminent.”
The Fed opened the door to rate cuts beginning late last year, but more recent economic data, including stubbornly persistent inflation, has tempered expectations. This appeared to trigger the market’s April retreat, though the extent or duration of the current pullback is unclear. In fact, slower than expected April jobs market growth again fueled speculation that the Fed could start cutting rates before the end of the year. In the immediate aftermath of the jobs report, markets rallied solidly.
In 2022 and 2023, the Fed raised the fed funds rate eleven times, to a range of 5.25% to 5.50%. The last change in interest rates occurred in July 2023. The Fed has held rates steady since then and projected three rate cuts in 2024.2 “April’s downturn showed the market’s reaction to recent Fed indications that rate cuts aren’t on the immediate horizon,” says Haworth.
While the Fed succeeded in its effort to slow inflation, it has had difficulty bringing inflation down to its 2% target range. “Data points indicating still elevated inflation (the Consumer Price Index stood at 3.5% for the 12 months ending in March) 3 corroborate the Fed’s current view that it’s too early to cut rates,” says Haworth. However, along with disappointing April jobs numbers, first quarter economic growth of 1.6% annualized4 was also lower than many anticipated.
What factors are likely to affect the stock market today and for the remainder of 2024?
In 2023, communications services, information technology and consumer discretionary stocks vastly outpaced the rest of the S&P 500.1 “What kept driving the markets to new highs were companies that are insensitive to persistently higher interest rates,” says Haworth. “Large companies like Nvidia, Microsoft, Amazon and Google that hold a lot of cash and have low borrowing needs are not greatly affected by changes to the interest rate environment.”
“Investors are trying to determine if the market has fully priced in reduced expectations for Federal Reserve (Fed) interest rate cuts,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Dating back to late 2023 and including the first three months of 2024, markets seemed to anticipate that rate cuts were imminent.”
2024 started much the same way, but a slow transformation may be underway. Based on year-to-date performance through late April, the energy sector and other 2023 lagging sectors have risen to the top.1
The impact of higher interest rates is reflected at the bottom end of the scale for S&P 500 sector performance. The interest-rate sensitive real estate sector, for instance, is down 9% for the year through April.1
The S&P 500 index of large-cap stocks topped 5,000 for the first time in February and continued to reach new highs through the end of March, before retreating in April. The S&P 500 recovered some of that lost ground in early May.
The environment has been less beneficial for smaller stocks. “The Fed’s interest rate policy matters meaningfully to smaller companies that likely must borrow more to fund operations and business growth,” says Haworth. “As a result, small-cap stocks are under more pressure in the current environment.”
Investors appeared to recognize this based on stock market results in 2023 and 2024, comparing the S&P 500 to the Russell MidCap Index and the Russell 2000 small-cap stock index.5
What are the keys to a sustained bull market? Haworth says three primary considerations deserve the most attention:
Additional risks to the market include the impact of global tensions highlighted by the Israel-Hamas conflict and the Russia-Ukraine war. The heated lead-up to what appears likely to be a closely contested presidential election may ultimately draw more investor attention.
“It remains a constructive stock market,” says Haworth. “Earnings are still moving in a positive direction, consumer spending has held up, and it still seems clear that at some point, a rate cut will be the Fed’s next interest rate move.”
The biggest potential concern in the current environment is valuation. “Stocks that have dominated the market in the past one year-plus may be reaching challenging valuation levels,” says Haworth. “Investors may consider diversifying with an equal-weighted S&P 500 exchange-traded fund.” Such a fund puts less emphasis on the largest stocks in the Index compared to a traditional S&P 500 fund.
Freedman encourages investors to view markets with a long-term lens. “Timing the markets and trying to be precise on when to be in and when to be out is challenging,” says Freedman. “Markets will do things at the exact opposite time you expect them to.” Freedman says investors can follow a more productive path. “Our best advice is having a plan, a programmatic approach to investing. That takes the emotion out of it.”
In the near term, says Haworth, “expect continued choppiness in the markets, and not necessarily a straight upward path for stocks in the coming months.” He says for those who still have a sense of caution about the stock market, “consider putting a portion of your portfolio to work in equities in a systematic way, such as dollar-cost averaging available cash over a series of months.”
Check in with a wealth planning professional to make sure you’re comfortable with your current investments and that your portfolio is structured in a manner consistent with your time horizon, risk appetite and long-term financial goals.
The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Diversification and asset allocation do not guarantee returns or protect against losses. The Russell MidCap Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.
Stocks are shares of publicly traded companies can be bought and sold. These transactions occur on exchanges and over-the-counter (OTC) marketplaces. The activity of pricing, buying and selling stocks is all activity that occurs in what is generally called “the stock market.”
Stocks move up and down frequently. Between November 2023 and early March 2024, the stock market moved higher (following a generally downward trend between August and October 2023). The market’s strength over that period reflected, in part, expectations of a major change in Federal Reserve (Fed) monetary policy. The Fed indicated that it may begin cutting its short-term, federal funds target rate in 2024.2 That’s a major shift from Fed policy that saw 11 consecutive rate hikes between March 2022 and July 2023, a move designed to slow what had been a surging inflation rate. “The Fed’s interest rate stance is a prime consideration for equity investors in today’s market,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Yet it appears that investors may have to wait until later in 2024 to see any Fed rate cuts.” Because investors realized delays in Fed rate cuts were likely, in April stocks gave back some of their gains.
These three indices are frequently quoted on daily news reports reflecting daily performance of the stock market. The Dow Jones Industrial Average, perhaps the most quoted index, reflects the performance of 30 prominent stocks listed on U.S. exchanges. The Standard & Poor’s 500 tracks a broader universe of 500 large U.S. stocks. The NASDAQ Composite Index provides a measure of performance of 2,500 stocks listed on the National Association of Securities Dealers (NASD) Automated Quotations exchange. These represent small-, mid- and large-cap stocks. Investors often track these indices, particularly over time, to measure broader stock market performance.
With inflation retreating and interest rate cuts likely coming later this year, how should investors position their portfolios to capitalize on potential opportunities, while guarding against risks?
A fresh look at managing your cash and investments in today’s changing interest rate environment can help support your pursuit of the goals that matter most to you.
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