Market Update – April Returns (including dividends)

April Returns (including dividends):

S&P 500: 10.5%

S&P 500 Equal-Weight: 6.0%

Dow Jones:  7.2%

Nasdaq: 15.3%

MSCI EAFE:  7.5%

MSCI Emerging Markets: 14.7%

Bonds (US Aggregate):  0.1%

 Economic & Policy Highlights

Interest Rates & Fed Outlook

• The US Federal Reserve kept rates unchanged with many on the committee expressing concern regarding oil and its impact on inflation
• The EU, England, Japan and Canada kept rates unchanged but warned about rising inflation
• Kevin Warsh was named the next Fed Chairman, replacing Jerome Powell
• The Bank of Japan intervened in currency markets, buying Yen and selling dollars

Trade & Tariffs

• The White House confirmed its summit with China would occur May 14-15

Employment & Growth

• US Q1 GDP missed expectations but business investment (ie. AI) growth was the fastest pace in 3 years
• Spirit Airlines approached the US government for help, offering a stake in the company
• The average monthly mortgage payment hit $2000
• The national average gasoline price hit $4.10 a gallon

Consumer spending & sentiment

• The average tax refund was closer to $350
• Employment growth was better than expected
• US consumer sentiment fell to a record low

Geopolitical Volatility & Energy

• Oil rose 3.6% as the blockade effectively stopped 10-12 million barrels of oil from shipping daily
• The UAE announced they would leave OPEC in May
• Several countries continued to release oil from their strategic reserves
• Gold fell 1.1%, even with the Chinese Central Bank buying the most gold in a year.

Summary Impact

• On April 8^th, the US and Iran agreed to a 20-day ceasefire
• Stock markets quickly recouped all war related losses and more, as investors quickly bet on a quick resolution.
• Oil prices remained elevated as Iran demanded that all ships required Iranian approval to transit the Strait of Hormuz
• The US announced their own blockade of the Strait of Hormuz in order to apply economic pressure on Iran
• The Strait of Hormuz remained closed the entire month, creating the biggest supply disruption in the history of the oil market.
• Investor euphoria regarding AI once again sparked sharp but narrow rallies in global markets
• Global bond markets began to price in rising inflation

Commentary:

Stocks rallied globally on hopes for a quick resolution to the Iran war and the re-opening of the Strait of Hormuz.  Once again investors turned their attention to the promises of AI technology and the underlying belief that it would underpin significant earnings growth.  Investors behaved as if the war never happened and chose to ignore the fact that oil prices finished the month of April at levels that were higher than at any point during the bombings in March.  The White House fed markets a steady flow of promises and hints that a deal was just around the corner, which stock markets blindly rallied on, despite never resulting in a peace deal.   Emerging markets were the poster child for AI euphoria as markets like Taiwan and South Korea jumped to new highs, driven by only a handful of stocks. EAFE shares rose but were more sanguine as the risk of higher rates and higher energy prices represented greater headwinds to their respective economies. Overall, April macroeconomic data showed headline resilience, but upon deeper analysis, the economy’s underpinnings remain fragile.

Fixed income markets basically marked time as equities exploded higher, creating a divergence that did not go unnoticed.  Given the more optimistic tone of markets, credit spreads narrowed but overall concerns regarding potential inflation capped the upside.  Private credit issues continued to plague sentiment as investors demanded their cash back from these illiquid funds, only to be told they would receive a small fraction of their initial investment returned due to redemption caps.

While we were pleased to see markets rally in April, we are concerned by the magnitude and lack of breadth, given the rise to new all-time highs.  April saw some of the rarest market behaviors in modern history, driven by momentum, stock concentration, leverage and the fear of missing out on another TACO (Trump Always Chickens Out) opportunity.  We believe the level of complacency in the stock market is bewildering given that the energy shock remains unresolved and getting worse by the day.

It is our opinion that risks remain elevated on a number of fronts.  Valuations have quickly returned to lofty levels. Inflation is becoming a serious risk once again with the potential to escalate above market expectations.  Supply shortages of energy continue to build and are at risk of becoming more acute.  The Iranians clearly have significantly more leverage in negotiations and can easily wait out the US, inflicting rising economic pain on the world economy.  With the rapid and possibly premature recovery in stocks behind us, we believe markets are now far more vulnerable to any fallout from a prolonged conflict or unexpected economic shock.