Key takeaways
After reaching all-time highs in March this year, the stock market declined precipitously in April.
Recent market volatility appears centered on the timing of potential interest rate cuts by the Federal Reserve.
Stronger-than-expected economic data is playing a role in Fed rate cut delays.
After reaching a new record high in late March 2024, the S&P 500 slipped nearly 4% in April’s opening weeks. While the S&P 500 remains in positive territory for the year, questions surrounding the timing of Federal Reserve interest rate cuts appear to be dampening investor enthusiasm for equities in April.
“It’s notable that this is the first real pause in the current bull market rally since October 2023,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Investors appear to be resetting their positioning.” Haworth notes that markets are adjusting to a new interest rate paradigm. 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’s held rates steady since then and projected three rate cuts in 2024.1 “Markets are reacting to recent Fed indications that rate cuts aren’t imminent,” says Haworth. “Even as the Fed projects three rate cuts in 2024, markets priced in as many as six.” Haworth says now it’s possible that no more than one or two rate cuts might occur this year, depending on what economic data emerges.
A primary reason for the Fed’s hesitancy to initiate rate cuts is the surprising strength of the U.S. economy. While the Fed succeeded in its effort to slow inflation, it has had difficulty bringing inflation down to its 2% target range. “Data points like a strong jobs report (more than 300,000 jobs created in March) and still elevated inflation (the Consumer Price Index stood at 3.5% for the 12 months ending in March)2 corroborate the Fed’s current view that it’s too early to cut rates,” says Haworth.
What factors are likely to affect the stock market today and for the remainder of 2024?
For all of 2023 and in the opening months of 2024, communications services and information technology stocks outpaced most of the S&P 500.3 “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.” In contrast, smaller companies that often need to borrow or issue debt to raise capital, face higher interest costs. As a result, small-cap stocks lagged large-cap stocks in 2024’s opening months.4
“What keeps driving markets to new highs are companies that are insensitive to persistently higher interest rates,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “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.”
As the market anticipated an end to rate hikes and expectations of Fed rate cuts grew, the stock market soared from November 2023 through March 2024. Through mid-April, market leadership still favors the communication services and information technology sectors, but energy, industrial and financial stocks are also performing well.3 The spread between the top sectors and the rest of the market today is narrower than it was in 2023.
The impact of higher interest rates is reflected at the bottom end of the scale for S&P 500 sector performance. Utilities and real estate stocks suffered, for example, as both sectors are interest-rate sensitive.
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 environment has been less beneficial to 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-caps 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.
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.
Freedman says it’s important to maintain an appropriate perspective about the markets. He 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.” Freedman says such an approach helps investors avoid buying too much when the market is up and selling too quickly if stocks decline.
In the near term, investors should prepare for the market’s recent volatility to persist. “Expect continued choppiness in the markets, and not necessarily a straight upward path for stocks in the coming months,” says Haworth. Yet he says investors may be better served by positioning their portfolios for the long-run. “We’re encouraging investors who may have taken a more cautious approach before to adjust back to their long-term strategic target portfolio today.” Haworth 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 recent strength seems to reflect, in part, expectations of a major change in Federal Reserve (Fed) monetary policy. The Fed indicated at its December 2023 meeting that it may reverse course, and begin cutting its short-term, federal funds target rate in 2024.6 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.”
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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