The S&P 500 index dwindles in April
Stock market sentiment in the first 3 months of the year was very positive despite the geopolitical challenges in the world. The stock market rally in March saw a level of over 5250, which was mainly driven by tech companies. April was a turning point. Firstly, the upbeat mood was dampened by a potential conflict between Israel and Iran. Even though an outright war was avoided, ICE Brent crude futures hit a six-month high of $90/bbl in early April amid escalating tensions in the Middle East and the attacks on Russian refineries. Persistent inflation and sluggish US GDP growth data dampened the investor mood further as the likelihood of a rate cut in June became less likely.
The buzzword ‘Magnificent 7’ was the main driver of the S&P 500 rally in the first quarter of 2024. The market share of the biggest seven tech companies (Tesla, Alphabet, Meta, Microsoft, Nvidia, Apple, and Amazon) comprises about 25 percent of the S&P 500 index. In April, a contributing factor to the poor performance was the significantly falling share prices of Tesla and Apple. Both companies face contracting demand from China and their earnings expectations are under pressure.
At the end of April, the S&P 500 index was 4.2 percent down compared to the end of March. The Price/earnings ratio of the S&P 500 index remains over 20. Based on historical standards this takes the index to the overvalued territory.
PMI and consumer outlooks don’t improve
The Chicago Purchasing Managers’ Index (PMI) fell further to 37.9 in April from 41.4 in March. This was well below the market anticipation of 44.9. The index’s long-term average from 1967 to 2024 is 54.7. Hence its current value indicates a major contraction in business activity.
The Conference Board’s consumer confidence index deteriorated for the third consecutive month in April, to 97.0 (1985=100) from a downwardly revised 103.1 in March. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—declined to 142.9 (1985=100) in April from a downwardly revised 146.8 in March. Furthermore, the Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—fell to 66.4 (1985=100) from a slightly upwardly revised 74.0 last month.
A reading below 80 for the Expectations Index indicates that consumers are still concerned about a recession this year. The dip in consumer confidence indices is a reflection of consumers facing the fact that rate cuts may be delayed. Amid the improving economic conditions, consumers remain anxious with no clear improvement in their confidence.
June rate-cut becomes less likely
In June 2024, it will be two years since the Fed started its monetary tightening with front-loaded rate hikes to bring the US inflation down to the policy target of 2 percent. The latest data release in April indicated that the core PCE inflation was 2.5 percent in March, slightly up from February’s 2.4 percent. This indicator is the Fed’s policy reference for rate changes.
Inflation upticks in two months in a row is a matter of concern for the Fed especially when the labor market remains tight with higher numbers of job creations. The US economy is still expanding at a respectable pace, but the GDP growth in 2024 Q1 was only 1.6 percent according to the ‘advance’ estimate, less than half of the growth rate in 2023 Q4.
The Fed’s Chairman Jerome Powell is adamant that the rate cuts will only come if the inflation rate shows clear signs of cooling. The latest data release indicated that this was not the case. As a result, the Fed left the rates unchanged today, and, reading between the lines, a June rate-cut has also become an unlikely outcome.
The Fed said it will slow the pace of its monetary tightening in the coming months. Rather than lowering long-term rates, the move is designed to ensure there are enough cash reserves in the banking system to allow the Fed to control short-term rates.
Strong employment growth keeps the wage pressure
Employment growth is an important decision factor for the timing of a rate cut. The correlation between US non-farm employment growth and CPI inflation is 0.52 in the last 23 years (monthly data). The correlation is ironically lower (0.50) when we consider the Fed’s favorite gauge, core PCE instead of CPI inflation. Based on the latest employment and inflation data, now we expect the Fed to refrain from cutting the rates before September.
As can be seen in the chart below, US non-farm payrolls seem to be still rather robust, close to its long-term average, to push the inflation rate down to the Fed’s target level of 2 percent.
