In April, the markets experienced a pullback, with the Nasdaq losing 4.40%, the Dow Jones falling 5.00%, the S&P decreasing by 4.17%, and the TSX losing 2.04% for the month. The year-to-date performance of the indexes are outlined at the bottom of this commentary.
The month of April saw volatility pickup and a pullback in the markets. As we outlined in our March market commentary, we expected an increase in volatility and a pullback in the markets in Q2. The greatest influence on market volatility is the anticipated changes in US central bank policy regarding interest rates which is driven by inflation levels. We have been outlining since early 2023 that we do not see a lowering of interest rates until mid to late 2024. We maintain that view and do not see any interest rate cuts until late Q3 or Q4 this year at best. Remember interest rates are currently at historic 100-year normal levels and unless central banks are confident that inflation will reach their target levels of approximately 2%, interest rates will remain unchanged. The market keeps pushing out expectations of interest rate cuts and reacting negatively each time there is an anticipated delay for anticipated rate cuts. Inflation remains sticky and one or two data points showing inflation may be coming down will not be enough to change interest rate policy. In the past week alone, we have seen market concerns go from stagflation with no rate cuts and possible rate increase to inflation moderating and possible rate cuts in September with the resulting gyrations in the indexes. Our overall view remains that we are in a bull market and pullbacks as volatility increases are normal within a healthy bull market and are to be expected. We would like to highlight the following:
• Canadian dollar will weaken further against the US dollar in 2024 as it is likely the central bank in Canada will cut rates prior to the US central bank as the Canadian economy will weaken soon and to a greater degree than in the US.• Inflation will remain higher for longer than anticipated with a possible reacceleration of inflation before a moderation to central bank target rates.
• Bullish sentiment readings have moderated somewhat but have not declined to historic levels within market pullbacks that could signal the bottoming of those pullbacks in the short term. We would still expect more volatility and further pullbacks until bullish sentiment readings align more with historic readings in a bottom out process. This is normal market price action given the prior increases in stocks over the past 5-6 months.
• Over the past 40 years, May has been a good month ending positive 77% of time in bull markets. With the positive Q1 and a negative April, May turns out positive 83% of the time. This may suggest further volatility and a bottoming in May.
• The S&P 500’s 25.3% performance in the five months through March 31 was only the seventh time the index has gained more than 25% over a five-month span since World War II. That usually bodes well for the stock market. On average, the S&P 500 has gained an average of 6.1% three months later and 7% six months later.
• At Investment Strategies, we anticipate the markets to continue rising throughout the year, with stronger gains expected in the second half and a further choppy market in Q2. This year, being a presidential election year, has historically been positive for the markets.
In summary, we maintain a constructive outlook on the market and expect the market to continue higher as 2024 unfolds with pullbacks along the way and increased volatility at times.
