The stock market absorbed lots of bad news in April. Investors shrugged off the nation's third bank failure of 2023, recession fears, and mounting angst over a possible U.S. debt default. Instead, they took solace in first-quarter earnings that didn't turn out as bad as expected. And started looking ahead to an eventual halt in interest rate hikes by the Federal Reserve.
"The market embraced what it expects to be the Fed's last hurrah of rate increases," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Hopes that the Fed rate-hike cycle is over rose May 3. The Fed raised its key borrowing rate a quarter-point to a range between 5% and 5.25% (its highest level since 2006). But it signaled in its post-meeting statement that it could be done raising rates.
What's Coming In May For The Stock Market?
Looking ahead in May though, investors shouldn't get complacent as risks remain on the horizon, said Mark Haefele, chief investment officer at UBS Global Wealth Management.
"The U.S. economy is slowing, the impact of the banking turmoil continues (after the First Republic Bank collapse), and the debt ceiling talks may add to volatility," Haefele said. Treasury Secretary Janet Yellen said this week that the federal government may not be able to pay its bills as early as June 1 if Congress doesn't suspend or raise the debt limit.
In April, major market indexes fared well. The Dow Jones Industrial Average led the way with a 2.48% advance, followed by the S&P 500's 1.56% gain, and the Nasdaq's fractional gain. Foreign stocks finished in the green too, with the MSCI EAFE index rising 2.3%. The U.S. bond market was relatively calm, as the Fed had no scheduled meetings in April and made no rate announcements. The 10-year U.S. Treasury yield barely budged, closing the month lower at 3.42%.
Dealing With Stock Market Jitters
Still, ongoing jitters did send investors scurrying toward more established large-cap stocks and away from small caps. The average U.S. diversified equity fund edged up 0.05% during the month, according to Refinitiv Lipper data. Large-cap value funds gained 1.79%, S&P 500 index funds rose 1.52%, and large-cap core funds advanced 1.51%. "Large caps outperformed as investors flocked to higher-quality companies," said Jurrien Timmer, director of global macro at Fidelity Investments.
Sector performance was mixed in April. The biggest winners were agriculture commodities, up 3.34%; health and biotech, up 3.29%; and international real estate, up 3.27%. The biggest sector losers were science and technology, which fell 3.4%; global science and technology, down 3.34%; and industrials, off 1.9%.
With the April headwinds unlikely to disappear overnight, UBS's Haefele recommends that stock investors not get too aggressive with their bets in May. "We recommend more defensive sectors, such as consumer staples and utilities."
Mixed Bag With ETFs
April was a mixed bag in the ETF space. The average U.S. diversified stock ETF eked out a 0.04% gain, but there were wide divergences in performance. The No. 1 performer was Invesco Russell 1000 Dynamic Multifactor, which gained 2.9%, followed by a 2.89% rise for Capital Group Dividend Value, and a 2.66% gain for Invesco S&P 500 Low Volatility. On the downside, ARK Innovation led the way with a 10.96% decline.
Overall, year-to-date returns for the best ETFs, ones that invest in tech and growth stocks, remain robust. The Invesco Nasdaq 100 was up 21.38% through April. Invesco QQQ Trust sported a 21.32% gain. And Vanguard Mega Cap Growth was 21.13% higher. A big reason why those ETFs fared well is because they have sizable weightings in Microsoft, Apple, Facebook parent Meta Platforms, Alphabet, and Nvidia. Those five stocks accounted for 70% of the S&P 500's 8.59% gain in the first four months of the year, according to Jason Trennert, chairman and chief investment officer at Strategas Research Partners.
Playing The Sectors
Among sector ETFs, the top gainers were in the mid- to high-single digits and came from a wide array of asset classes. The best performer was iShares U.S. Home Construction, up 7.82%. IShares MSCI Europe Financials was next with a gain of 5.72%. And SPDR S&P Biotech rose 5.24%. The laggards were in the semiconductor and clean energy spaces. SPDR S&P Semiconductor cratered 14.56% and First Trust Nasdaq Clean Energy Green Energy dipped 13.92%.
The top global funds were from unexpected places. iShares MSCI Poland rallied 13.82%, while iShares MSCI Saudi Arabia rose 6.3%, and IShares MSCI Switzerland gained 6.11%.
Bonds On A Roll
Bond fund performance was generally positive, with fixed income funds rising 0.41% in April to extend their year-to-date gain through April to 3.26%.
After the Fed's rate hike Wednesday, Whitney Watson, global co-head and co-CIO of fixed income at Goldman Sachs Asset Management, offered this advice to bond investors: "We think higher yields and a world of greater uncertainty create a strong case for investors to restore allocations to high-quality core bonds." BlackRock Investment Institute also favors bonds in the current environment. It sees yields staying high which means income is back as a portfolio driver.
The next big drama for the markets, however, will be the debt ceiling negotiation in Congress.
"For investors, it is important to appreciate the risk of a debt-ceiling disaster," said David Kelly, chief global strategist for J.P. Morgan Asset Management.
