May 2024 Market Commentary
A Winning Streak Ends
The S&P 500 Index's five-month winning streak came to an end in April, reminding investors that getting every investment decision right is an unreasonable expectation. The most recent economic and inflation data shook investors during April, calling into question the Fed's plan to reduce key interest rates in 2024.
| Index | April 2024 (%) | YTD (%) | 1-Year (%) | 3-Year Annualized (%) |
| S&P 500 Index | (4.1) | 6.0 | 22.7 | 8.0 |
| Dow Jones Industrial Average | (4.9) | 0.9 | 13.3 | 5.9 |
| NASDAQ Composite Index | (4.4) | 4.5 | 29.1 | 4.7 |
| Russell 2000 Index | (7.0) | (2.2) | 13.3 | (3.2) |
| MSCI All Country World Index (ex U.S.) | (1.7) | 3.0 | 9.9 | 0.9 |
| MSCI Emerging Markets Index | 0.4 | 2.9 | 10.2 | (5.4) |
| U.S. Aggregate Bond Index | (2.5) | (3.3) | (1.5) | (3.5) |
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Emerging Markets proved to be the safe haven during a tumultuous April for investors, posting the lone positive monthly return. The major U.S. large cap indices declined between 4% and 5%, while small caps fell 7%. The U.S. bond market suffered its worst month since last September, as interest rates across the yield curve ticked higher. At the sector level, Utilities gained 1.7%, while Real Estate, Technology and Health Care all fell more than 5%.
"A long list of losers from my own portfolio constantly reminds me that the so-called smart money is exceedingly dumb about 40 percent of the time."
-Peter Lynch
Smart Money
Wall Street has its own language. Colorful expressions like "wall of worry" and "falling knife" show up in financial media daily, describing the ups and downs of markets and individual securities. It is debatable if the Wall Street cliches are informative or just amusing. I find the term "smart money" both informative and amusing. "Smart money" generally refers to the capital managed by institutional investors, like mutual fund managers, pension fund managers, and financial institutions. Institutional investors are well-formed, sophisticated, and manage very large sums of money. They have the ability to move markets given the size of their trades. By contrast, "dumb money" (a term I do not find informative and amusing) refers to retail investors, individuals who invest their own money, because they lack the expertise and knowledge of professional investors.
Lynch, the former Fidelity Magellan fund portfolio manager, is considered by many to be the greatest mutual fund manager of all-time. From 1981-1990, Lynch's Magellan fund delivered a 21.3% annualized return, beating the S&P 500 index by more than 7% per year. His remarkable run attracted thousands of investors, increasing the size of the fund from $20 million in 1977 to $14 billion in 1990. Lynch's success did not come from being right all the time.
In fact, Lynch suggested that "if you're terrific in this business, you're right six out of ten times." Put another way, you are terrifically successful even if you are wrong four out of ten times. Still, these stock market batting averages do not tell the whole story. Evaluating a fund manager's track record does not consider the level of risk taken by the manager to achieve those returns. Risk matters. Nonetheless, Lynch's ability to overcome mistakes rationally and consistently is worthy of his "smart money" title, and places him among the best in the business.
April Fools
Many investors, from retail to institutional, likely got something wrong in April. More than 20% of the stocks in the S&P 500 index declined by at least 10% last month. Meta, Intel, Boeing, Accenture, Lowe's, CVS, and Blackstone, to name a few, dropped by double-digits. Isolated, the numbers are concerning. But the declines are typical. As the graphic below depicts, negative returns should be expected.
A look back at Meta's monthly returns over the last five years reveals that the stock declined in 38% of the months, and nearly 40% of the time there was a monthly decline, it was by at least 10%. Despite the enduring monthly selloffs, Meta gained 17% per year, besting the S&P 500. Experiencing short-term losses is a given when investing in the stock market. As your investment time horizon expands, the probability of losses materially declines.
Nevertheless, April tested investors' patience. A mixed bag of economic data rattled markets, ending the S&P 500 index's five-month winning streak. First quarter U.S. Gross Domestic Product (GDP) showed a meaningful deceleration, dropping from an annualized growth rate of 3.4% in the fourth quarter last year to 1.6%. Of concern is the impact of slowing economic growth on corporate earnings. According to Factset Research, with 80% of S&P 500 companies reporting first quarter earnings, the bellwether index is on pace to register a 5% year-over-year increase in earnings, the highest level since the second quarter of 2022.
[ii] For the calendar year 2024, analysts expect earnings to grow 11.8%, which is above the 10-year average. At present, the estimated growth rate is not reflective of an economic slowdown. If earnings estimates decline, we may see lower stock market valuations.
Inflation's Mixed-Message
In addition, the Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures Price Index (PCE), indicated inflation remained stubbornly persistent. It was a gut punch to bond investors, as hopes for aggressive interest rate cuts faded. Service-sector inflation jumped by 5.1%, nearly double the prior quarter's pace. The inflation news is not all gloomy, though. According to the Federal Reserve's Inflation Nowcasting, May month-over-month Consumer Price Index (CPI) is forecasted to decline. The last time there was a negative print was May 2020. Not to be overlooked, the headline PCE forecast is 0.00%.
Furthermore, a report from Realtor.com indicated that for eight straight months, U.S. rents have declined year-over-year. The report looks at rents for studios and one and two-bedroom apartments, condos, townhomes, and single-family homes in the 50 largest metropolitan areas.[iv] While the trend is encouraging, the median rent for March was still $313 higher than the same month in 2019, a 22.2% increase. The current median asking rent is $1,967, which is just 4.2% below the record high of $2,054 reached in August 2022. In all, the inflation data seems inconclusive. Without clarity on the path for inflation, monetary policymakers may stay on the sidelines.
Looking Ahead
The next Federal Open Market Committee (FOMC) meeting is scheduled for June 11-12. Currently, the CME FedWatch tool is showing a 92% probability of no rate action at the meeting. Worth noting, key April inflation data will be released in the coming weeks. The inflation data may surprise investors, driving sentiment-driven trading. We remain focused on fundamental factors, like corporate earnings, industry trends, and aggregated economic indicators to define our long-term investment strategy.
Successful investing requires patience. As highlighted earlier in our commentary, the longer you stay invested, the lower the probability of negative returns.
We appreciate your confidence and support and hope you reach out to an Old Point Wealth Management team member with any questions.
[iv] https://www.realtor.com/news/trends/rent-prices-march-2024/
Market Commentary Disclosures
*Magnificent Seven: The term "Magnificent Seven" was coined by others and should not be construed as an endorsement or indicator of any stock or company's quality.
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Index Definitions
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average fo the 30 blue chip stocks that are generally the leaders in their industry. It has been widely followed indicator of the stock market since October 1, 1928.
NASDAQ Composite Index: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
Russell 2000 Index: The Russell 100 Index is comprised of the smallest 2,000 companies in the Russell 1000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 19,1978.
S&P 500 Index: The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of the available market capitalization.
MSCI Emerging Markets Index: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in the each country.
U.S. Aggregate: The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (Agency fixed-rate pass-through), ABS and CMBS (agency and non-agency). (Future Ticker: I00001US)
MSCI ACWI Excluding United States Index: The MSCI AC World ex USA Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1987.