E*TRADE Capital Management
First, the bad news: Investors hoping for some relief after a volatile, negative Q1 were instead served up the US stock market’s worst month in more than two years.
The good news: We’ve been here before.
After a month like April it’s important to remember that this type of volatility comes with the territory when you’re a long-term investor. The market, eventually, comes out the other side, as do investors who stay the course.
Last month saw a market still adjusting to high inflation, rising interest rates, and a war in Ukraine also grapple with the unknown effects of massive COVID lockdowns in China and a less-than-inspiring start to earnings season. Results have been mixed, and many of the stocks that have led the market for the past few years have faced earnings pressure.
Let’s take a look at where things stand as we kick off the new month.
The S&P 500’s 8.7% decline in April marked its biggest monthly loss since March 2020, but that paled in comparison to the Nasdaq Composite’s 13.2% slide, which left the tech-heavy index in a bear market (more than 20% below its November high), and at its lowest level since December 2020:
Consumer staples—a traditionally defensive area of the market—was the only positive S&P sector in April, while communications services and consumer discretionary were the biggest drags on US performance:
Thanks to an upturn in the final two days of the month, international equity returns last month were a little better than those in the US, with developed and emerging markets both falling less than the S&P 500. But one of March’s biggest decliners, the MSCI EM Europe & Middle East index, was one of the few regional indexes to end April with a gain (+1%). The MSCI EAFE Index of developed markets fell 6.5% in April, while the MSCI Emerging Markets Index fell 5.6%:
As interest rates continued to rise in April, bond prices, which move in the opposite direction, continued to fall. The benchmark 10-year T-note yield pushed to 2.95% toward the end of the month—its highest level since December 2018—before ending April at 2.89%. The 10-year yield’s 105 basis point jump since February 28 was its biggest two-month increase since July 2003. And while the yield curve was slightly less flat than it was at the end of March, the 10-year yield ended April below the 5-year yield for the second month in a row:
Regardless of when it ends, the market’s current volatility will likely resemble past episodes: something many investors recognize—often only in retrospect—as times they should have stayed the course, or even added to holdings. That said:
- Don’t be surprised by more downside. Yes, more volatility is likely. As painful as this downturn may feel, remember the US stock market is just four months removed from a historic rally—its biggest 21-month gain in more than 60 years, in fact. The S&P 500 is still much closer to its January all-time high than it is to its March 2020 low.
- Growth concerns taking center stage? Inflation may still be the market’s front-burner issue, but last month’s mixed earnings may signal a different challenge is about to heat up. As Morgan Stanley analysts argue, inflation (and inflation expectations) may have peaked, and slowing growth could emerge as the primary driver of stock prices.1
- Whither fixed income? It’s not all bad news. The sharp jump in interest rates, for example, is beginning to provide value in the bond market—we’re finally starting to see attractive yields in some areas of the fixed-income space.
Nonetheless, investors would be prudent to stay disciplined and keep defense top of mind. Maintaining a diversified, balanced portfolio—rather than changing course or taking unnecessary risks—is a time-tested way to confront volatility and uncertainty.
Thanks for reading, and we’ll talk to you again next month.
Head of Portfolio Construction for Morgan Stanley Portfolio Solutions
Mike Loewengart is Head of Portfolio Construction for Morgan Stanley Portfolio Solutions and a Managing Director in the Morgan Stanley Wealth Management Global Investment Office. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.
Executive Director, Morgan Stanley WM Global Investment Office
Andrew Cohen is an Executive Director in the Morgan Stanley Wealth Management Global Investment Office and an investment strategist for ETCM LLC. Prior to joining E*TRADE, he was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a Chartered Financial Analyst (CFA®) charterholder and a member of the CFA Institute and CFA Society New York. He is a graduate of Virginia Tech with a Bachelor of Science (B.S.) in finance.