Gill Capital Partners April 2024 Market Update

Will April showers bring May flowers for financial markets? We will certainly find out over the next few weeks as most of the S&P 500 is set to report earnings. So far, April’s showers have come in the form of stronger economic growth and firmer inflation than anticipated, which has led to a jump in Treasury yields as expectations for interest rate cuts continue to soften. Higher interest rates have spooked markets and stocks have seen a mild correction to start the second quarter as they digest the new (stronger) economic reality and wait for earnings to roll in. We will get into all of this and more, and provide our views as well, but first, the interesting chart of the month.

Consumers are feeling increasingly more confident and are planning to travel. The Conference Board’s ongoing consumer confidence survey asks households if they plan to travel abroad, and in this month’s survey (shown below), a record percent of U.S. respondents indicated they are planning to vacation in foreign countries within the next six months.

Inflation

We received the monthly update on inflation from March earlier this month, which showed that the Consumer Price Index (CPI), a broad measure of the cost of goods and services, increased 0.3% for the month and 3.5% from a year ago. The CPI accelerated at a faster-than-expected pace in March. Excluding food and energy prices, the so-called “core CPI” also accelerated more than anticipated, rising 0.4% on a monthly basis and 3.8% from a year ago. Energy was the largest contributor to the increase in prices in March as oil prices jumped. Energy prices were up 1.1% for the month after climbing 2.3% in February. Shelter prices also continued to be an inflationary force, rising 0.4% for the month and 5.7% from one year ago. Auto insurance prices continued to grow and used vehicle prices fell.

Our view – As you can see from the chart below, while inflation on a year-over-year basis has been trending down and is significantly lower than its peak in mid-2022, we have seen prices move slightly higher over the past few months. While the expectation has never been for a straight-line decline in prices, recent inflation numbers have been higher than economists were expecting.

Energy, which had been a deflationary factor for most of the past year, is again contributing to inflation.

Markets had begun to pay less attention to the monthly CPI numbers, as confidence was growing that inflation was coming under control and would quickly approach the Federal Reserve’s stated target of 2%. Furthermore, many economists were expecting a slowing economic environment, if not an outright recession, due to higher rates and the removal of other stimulus programs, a view which led markets to anticipate imminent rate cuts. Rather than a weakening economy, however, we have seen strengthening over the past two quarters, which has led to a slight uptick in inflation, and with it, some drastic revisions to interest rate forecasts (more on this below). While the inflation picture is far better than it was coming out of COVID, we still have work to do. On the bright side, what we’re seeing is the result of a much better economic picture than most were anticipating at this time.

Interest Rates & The Federal Reserve

Interest rates have been moving higher in 2024, just when many were anticipating or hoping for lower rates. As shown in the chart below, interest rates on U.S. Treasuries are higher by roughly .75% than they were at the beginning of the year.

At the beginning of 2024, economists and the market were anticipating that the Federal Reserve would cut interest rates nearly seven times over the course of the next twelve months, taking the Fed Funds rate to around 3.5%. Now, with the strong economic backdrop combined with stickier inflation, the prospect of interest rate cuts has changed materially. The market is now only pricing in two interest rate cuts between now and next January, which would take the Fed Funds rate down to approximately 4.85%.

Our view –Economist and market predictions on the future of interest rates have been swinging wildly as of late, following the lead of economic data and performance. Based on the most recent data set, it does not make sense that the Fed would be cutting interest rates any time soon. We have more work to do to bring inflation closer to the 2% target, and thus far, the economy is holding up just fine, if not thriving, in this higher rate environment.

When we look across the various economic data points there is one specific component that sticks out – the labor market. Despite higher rates and the removal of various economic stimuli, the labor market is incredibly strong. The unemployment rate is hovering just below 4% and demographic trends are projected to keep the labor market tight for some time. The good news is that we feel the possibility of a recession is quite low at the moment, barring significant structural changes or idiosyncratic events. The bad news is that higher rates may be with us for a bit longer.

We will continue to update you as we learn more. Until then, get those summer travel plans abroad booked now!

As always, please let us know if you have any questions or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.