The U.S. stock market experienced a volatile April 2024. After reaching all-time highs in late March, the benchmark S&P 500 mostly retreated in April, but also experienced significant volatility. The S&P 500 lost more than 5% of its value through April’s first three weeks, then regained some of that lost ground. “Investors are trying to determine if the market has fully priced in reduced expectations for Federal Reserve (Fed) interest rate cuts,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Dating back to late 2023 and including the first three months of 2024, markets seemed to anticipate that rate cuts were imminent, with expectations of up to six rate cuts in 2024 priced into stocks.”
The Fed opened the door to rate cuts beginning late last year, but more recent economic data, including a stubbornly elevated inflation rate, tempered expectations. This appeared to trigger the market’s April retreat, though the extent or duration of the current pullback is unclear. “It’s notable that this is the first real pause in the current bull market rally since October 2023,” says Haworth. “Investors appear to be resetting their positioning.” In 2022 and 2023, the Fed raised the fed funds rate eleven times, to a range of 5.25% to 5.50%. The last change in interest rates occurred in July 2023. The Fed has held rates steady since then and projected three rate cuts in 2024.1 “Markets are reacting to recent Fed indications that rate cuts aren’t on the immediate horizon,” says Haworth. He adds that now it’s possible that no more than one or two rate cuts might occur this year, depending on the direction of forthcoming economic data.
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While the Fed succeeded in its effort to slow inflation, it has had difficulty bringing inflation down to its 2% target range. “Data points like a strong jobs report (more than 300,000 jobs created in March) and still elevated inflation (the Consumer Price Index stood at 3.5% for the 12 months ending in March)2 corroborate the Fed’s current view that it’s too early to cut rates,” says Haworth.
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What factors are likely to affect the stock market today and for the remainder of 2024?
A shift in market leadership
In 2023, communications services, information technology and consumer discretionary stocks vastly outpaced the rest of the S&P 500.3 “What kept driving the markets to new highs were companies that are insensitive to persistently higher interest rates,” says Haworth. “Large companies like Nvidia, Microsoft, Amazon and Google that hold a lot of cash and have low borrowing needs are not greatly affected by changes to the interest rate environment.”
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Category: WHY
