April may have showers, but for investors it also provided flowers, with strong gains across almost every market. After an abysmal March, which had US large-cap equities on the trajectory of a correction, the S&P 500 Index rebounded to post a 10.49% gain in the month. The markets found hope for an end to the conflict in the Middle East, shrugged off rising global interest rates, and absorbed the impact of increased energy prices on consumers.
Middle East Tensions Ease, Supporting Global Risk Assets
The main driving force for the month was the mild cooling of the Middle East conflict, allowing the dollar’s rise to moderate and drift down slightly relative to other currencies. Demand for the dollar is tightly linked to the need for oil. As oil supply dropped and prices increased, demand for dollars increased, putting pressure on asset prices. Negotiations and the ceasefire gave investors reason to hope for a quick end to the conflict.
Technology and Communication Services Lead the Rally
The rally was led by Communication Services and Information Technology, which were up 18.54% and 17.47% respectively. Health Care and Energy were the only two of the eleven sectors to post declines for the month, down 0.45% and 3.46% respectively.
Energy Sector Maintains Strong Year-to-Date Performance
Energy has rallied significantly due to the conflict, up 33.46% year to date (YTD), more than doubling the return of the next closest sector, Industrials, which has posted a YTD gain of 12.91%. Shale production has helped stabilize supply over the last several years, ramping production up or down relatively quickly compared to traditional oil wells. Additionally, supply from Venezuela has increased following recent geopolitical developments involving the Maduro government. Both of these factors give investors and the economy hope for lower oil prices.
However, Ukrainian attacks on Russian oil infrastructure, the dual blockades of the Strait of Hormuz, and Houthi rebels threatening the Bab al-Mandab Strait in the Red Sea will continue to make oil prices unstable.
Earnings Season Adds Support to Equity Markets
For now, we will take the bounce back as earnings season is underway with positive earnings growth so far and forecasts for more growth this year.
Mid-Cap and Small-Cap Stocks Deliver Strong Gains
Mid-cap and small-cap stocks also posted a strong bounce-back month. The S&P MidCap 400 Index was up 7.86%, while the S&P SmallCap 600 Index posted a gain of 10.41%.
International Markets Participate in the Global Rally
Foreign markets were not to be left behind in the rally. The S&P Developed Ex-US Broad Market Index (BMI) posted a gain of 8.15%, while the S&P Emerging BMI was up 11.39%.
The developed markets gain is interesting due to Japan, the United Kingdom, Canada, South Korea, France, Switzerland, Germany, and Australia making up 78% of the index. Of these countries, only Canada and Australia produce more oil than they import. Unlike the US, Information Technology and Communication Services are much smaller parts of the index, with Financials and Industrials leading the index. But hope has no borders, and for investors around the globe, the prospect of a resolution to the conflict was enough to push markets higher.
Fixed Income Markets Remain Under Pressure from Inflation
Fixed income had slightly positive returns for the month, with the S&P US Aggregate Bond Index posting a 0.09% gain. Longer-term US and global yields have been rising throughout the year due to inflationary pressures from higher energy and commodity prices.
Federal Reserve Leadership Changes Could Shift Policy Outlook
The US will see a leadership change at the most influential bank in the world, the Federal Reserve. Kevin Warsh’s confirmation vote is scheduled to happen before the May 15 end of Chair Jerome Powell’s term. Powell has indicated he will serve past his time as chair, possibly until his full-term end in 2028, based on the results of the investigation into cost overruns for construction that has been turned over to the Fed’s Inspector General. This means that Stephen Miran will be removed from the interim role he has held.
Stephen Miran had been advocating for lower interest rates during his limited time on the Federal Open Market Committee. With Powell staying and questions remaining regarding Kevin Warsh’s plans for the Fed, the dynamics may change considerably, prompting careful evaluation over the next several meetings. Also looming in the background is the Supreme Court decision on whether the President can fire Fed Governor Lisa Cook.
Precious Metals Pause After Extended Gains
Precious metals took a break from their climb higher during the month. The S&P GSCI Precious Metals Index declined 0.85% for the month. Given the geopolitical tensions globally and rising government debt levels, the longer-term prospects for gold remain intact.
Expecting showers but receiving flowers is a great way to end a month.
Investment Commentary by Jason Flores, CFA, CAIA – Executive Vice President & Chief Investment Officer at Central Trust Company.
At Central Trust Company, we continue to reassess the rapidly changing investment landscape for both risks and opportunities. If you would like to access our full monthly outlook and additional investment commentary, visit our Investments Learning Center. As always, if you have questions or concerns, please contact your Central Trust Company team. We are always ready to help.
