The month of April saw little change in the major stock indices as volatility fell to the lowest levels since November 2021. This occurred even though money supply, as measured by M2, is in the midst of its steepest decline since the 1930s, which looks like an omen of lower stock prices, to me.
Trading was fairly quiet in April despite a lot of moving pieces. Markets were supported by some positive themes from earnings season, consumer resiliency, and the weaker Dollar.
Disinflation was also in focus, with some pricing measures falling to their lowest levels since July 2020. Despite this, the Federal Reserve hiked short-term rates again at the early May meeting. There is a gap between market expectations and current Fed policy, which may see the Fed restarting hikes later this year if inflation doesn’t recede. If markets have not priced this in, I would expect it to create downside pressure on stocks.
Data this month also offered mixed takeaways. Gross Domestic Product, a broad measure of the US economy, came in below consensus. To match the Fed’s own 2023 GDP growth forecast, the economy will need to expand dramatically in the coming quarters.
While it may still be early, we are starting to see some improvement to corporate earnings forecasts for 2023 and 2024. Earnings results have been better than expected, and since corporate earnings are such an important factor in determining stock prices, that is a great signal for the health of the stock market.
From a technical perspective, stocks are approaching overbought territory. Market breadth is narrow, meaning that only a handful of stocks are leading, which makes the stock market appear to be doing better than what most investors’ portfolios reflect.
Given my belief that the S&P 500 is most likely stuck between a range of 3500-4200, we are taking a cautious approach. I heard a quote from Josh Brown of Ritholtz Wealth Management that describes our current policy: “it’s better to be wrong and cautious than wrong and reckless.” We didn’t expect the rapid rise in tech-stock prices so far this year, but we are comfortable with the exposure we do have there. If this is not an approach that you are comfortable with, please let your financial advisor know so that we can make the proper adjustments.
Overall, I believe that this bear market is in its later stages, so we’re not taking risk off the table altogether. You never know when the market will bolt higher, and just because my base case is for a recession, that doesn’t mean that stocks have not already priced that in. As economic and fiscal (the debt ceiling) concerns intensify, market volatility is likely to continue ahead. With that in mind, we will look to get less conservative as opportunities present themselves.
As we approach summer, I’ll remind you that markets will be closed on May 29 in observance of Memorial Day.