Watch the CPK Market Action Report: April 2023
Equity markets were able to climb higher for the month of March despite signs of a slowing economy. Will the Federal Reserve stay the course of higher rates for longer or will they be forced to lower rates as indicated by the bond market to ward off a recession and open the door to further gains in the equity markets and potentially higher inflation?
Watch the Market Action Report now:
Market Action Report
April 2023
INTRO TAG
Equity markets were able to climb higher for the month of March despite signs of a slowing economy. Will the Federal Reserve stay the course of higher rates for longer or will they be forced to lower rates as indicated by the bond market to ward off a recession and open the door to further gains in the equity markets and potentially higher inflation?
That action starts, NOW!
INDEX PERFORMANCE RECAP
All the major indices were able to forge higher this month with the Dow Jones Industrials gaining 2.54% and the S&P 500 3.57%. Fears of a slowing economy, higher rates and tighter lending requirements led many investors to flock into the large tech companies who are flush with cash, pushing the Nasdaq Composite up 5.59%.
EQUITY UPDATE
Investors continued to favor mega cap tech stocks this month. As fears of a potential banking crisis or shall I say a credit crunch looms, it is believed that these behemoths will be a safe haven from such issues. Several of these stocks have seen substantial gains over the last 90 days leaving many to think they are overbought. For the broader stock market to push higher, we need to see the S&P trading at levels below 4,000 and get data that isn’t suddenly “bad” and imply that U.S. economic activity is hitting a proverbial cliff. Right now, we don’t have either.
BOND UPDATE
Once again, bond yields reversed lower across the board for the month. The 5yr fell to 3.38% and the 10yr 3.33%. On the longer end of the curve, the 30 yr yield fell to 3.59%.
The 2-Year yield, which is the proxy for what the Fed thinks will happen to the fed funds rate, collapsed from 5% pre bank crisis to less than 4% as of last Monday. That’s a dramatic shift, and part of that was undone last week as the banking crisis remains mostly stable. The 2-Year yield rose 16 bps while the 10-Year yield gained 4 bps, reflecting the correction of that extreme decline in the 2-year.
The 10s-2s spread closed the week at -58 bps, down from the banking crisis highs below -40 bps, but still well off the pre-crisis low of -108 bps, and that reflects the very real expectation the Fed will hike just once more, if at all. The 2-Year yield reflects the market’s expectation of some rate cuts in 2023, although that hope will have to be validated by a further decline in inflation or, negatively, an uptick in bank stress before we can say the Fed will cut rates in 2023.
COMMODITY UPDATE
Crude dipped lower throughout the month, eventually recovering most of its declines closing out at $75.67/barrel. OPEC+ announced a surprise 1.15MM b/d cut to the groups’ collective production target. The move was aimed at stabilizing the volatile and weakening price of oil on the global market and was in addition to the already agreed upon 2MM b/d cuts from last October, bringing the total amount of cuts to just over 3MM b/d. The new cuts take effect in May. While oil prices could very well continue to rally towards $80/barrel or beyond in the coming days or weeks, the long-term outlook has not yet shifted away from bearish.
Copper was virtually flat this month closing out at $4.10. Technically speaking, copper has been in a slightly bearish downtrend since fading back from the January highs, which leaves the risks skewed to the downside for the industrial metal. Fundamentally, the heavier price action over the last two months reflects the ongoing worries about a looming recession which would have a materially negative impact on copper and other industrial metals and materials.
Gold closed out the month just off its fresh 2023 high at $1969/oz. The weaker dollar, firming Treasury market, and uptick in market-based inflation expectations all supported the gains in gold yesterday. While the near-term trend is still bullish in gold, as it has been for most of the last six months, the fact that prices remain below the 2022 highs in the $2,050/oz. area leaves the technical outlook uncertain and prevents us from having any conviction behind a bullish call on gold.
CURRENCY UPDATE
The US dollar fell precipitously through the month closing at $102.51. Rate expectations continue to drive currencies, and the Fed introducing the possibility of a pause is pressuring the dollar currently. However, for the dollar to move closer towards 100, we’ll need to either see economic data roll over further or disinflation restart.
ECONOMIC UPDATE
Last week, the ISM Services PMI and the ADP jobs report weighed on stocks like the other underwhelming economic data, because it showed a loss of momentum in the service sector and implied a hard economic landing may be more likely.
Bottom line, there was clear progress on service sector inflation in this report, but there also was clear deterioration of activity and that’s more indicative of a hard landing, not a soft landing.
THE WRAP
For the month of April, it seems unlikely that there will be some kind of market moving event that will allow equities to breakout above the 4150 level. Likewise, the strong economy and investor’s cash reserves has also allowed the markets to find support in the 3800 range. Although the lower bond yields may be reflecting a possible bounce in equities, the Fed’s focus on getting inflation down closer to 2% is keeping me from getting overly confident about any bounce in equities right now.
CPK FOCUS
For the month of April, the cash allocation in our equity models remains at 40% due to the model’s more aggressive nature.
Our broad focus is on International Equities, Cash and Commodities.
In International Equities, our focus is on Europe Emerging, Latin America and Europe Developed.
As for Domestic Equities, our focus is on Mid Cap Value, Mid Cap Blend and Small Cap Value with an emphasis on Basic Materials, Technology, Industrials, Consumer Non-Cyclical and Consumer Cyclical.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISKS, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the April 2023 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!