April Showers
April was rough for investors as nearly all major asset classes experienced declines. Equities and bonds fell as investors grappled with geopolitics, stubborn inflation, selling related to tax payments, and the upcoming US election. Positive returns came from an unlikely source amid a global selloff: emerging markets. Chinese equities continued their rebound, finishing up 5% in April, pulling the broader emerging market indices with them.
Despite the barrage of pessimism, there remains hope. Indeed, the pullback may offer an opportunity for those investors that may have missed out on the gains accrued during the first three months of the year.
First, we note that intra-year drawdowns are quite common in investing. On average, the market experiences a 14% decline during a calendar year, despite ending the year higher more times than not.
Many of these declines are short-lived, and can be traced to geopolitical events. In modern history, the S&P 500 has tended to recover losses stemming from a crisis in a matter of weeks – long before the event itself is resolved.
While progress on tamping down inflation seemed to stall over the last several months, we see few signs of a significant resurgence. The current 2.8% annual inflation rate is a marked improvement over the recent high-water mark of 5.6% in 2022, and thus, the Fed’s sense of urgency has diminished. Core goods inflation has returned to its typical low-single digits to negative contribution as supply chains have healed and global trade has picked up. Services and housing inflation remain elevated but seem to be reluctantly slowing. While talk of stagflation (a pernicious combination of very high inflation and low or negative economic growth) picked up in late March, Federal Reserve Chairman Jay Powell quickly arrested investor concerns, by stating that he saw neither the “stag” nor the “flation” that would warrant such a label.
Finally, election angst often leads to a post-Super Tuesday sell off as voters and investors resign themselve to the reality of their options. Historically, this period of grief ends pretty quickly and, on average, re-election years have proven to be profitable. In our view, investors overestimate politicians ability to impact the economy and markets. Government spending is responsible for less than 20% of the Gross Domestic Product, and the private sector has proven to be far more resilient to changes in fiscal policy than investors give credit.
While April presented investors with new challenges, we believe there are reasons for optimism moving forward. The recovery in emerging markets remains nascent, bond yields are attractive, and markets tend to adjust quickly to bad news. We will continue to look to capitalize on the long-term opportunities that emerge from these types of short-term market disruptions.