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The Message Versus Reality – Stock Market Sectors Respond to Persistently High Inflation and Interest Rates Thumbnail

The Message Versus Reality – Stock Market Sectors Respond to Persistently High Inflation and Interest Rates

When he met with top Central Bank officials on April 16th, Chairman Powell of the Federal Reserve communicated that an interest rate cut is unlikely anytime soon.  This announcement came on the heels of the increasing rate of inflation this year.  It was confirmed in the meeting of the Federal Reserve Board on May 1 when the Board voted to maintain the status quo regarding interest rates.  

Since December the Board signaled that a rate cut could be coming early in 2024.  This message was picked up by the financial news media and investors were expecting a rate cut would come by March and if not then, certainly by June. The change announced in April caught many by surprise.  

The reality is the bond market has been signaling higher rates since February, just the opposite of the message investors were hearing in the media.  Bond yields moved higher month by month and in April the yield on the benchmark 10 Year US Treasury reached the second highest monthly close since the summer of 2007.   Bond investors were watching inflation and expecting rates to remain high.  With Chairman Powell’s April message, hopes of any rate cuts were dashed and investors had to rethink their strategy for 2024.  

Some stock market sectors do not perform as well when bond yields are rising.  This economic environment is particularly challenging for growth stocks.  April was the first down month for technology stocks since last September’s correction.   Former market leaders became laggards in April.  Technology, communications, and consumer discretionary sectors took a back seat to consumer staples, utilities, energy, basic materials, and industrials.  The long-term trend is still positive for the former leaders, but in the near term more defensive sectors are the outperformers.   

Commodities are making a strong showing this year.  Gold surged in March and it hit another all-time high of $2,400 a troy ounce in April.   Silver notched its highest monthly close since May of 2021.  Base metals and oil are also doing well in 2024.  The CRB Index which represents global commodities outperformed stocks in the first four months of 2024 when compared to the Dow Jones Industrial Index.   

Investors need to plan on continued inflation and high interest rates in the foreseeable future.   We are entering a season when the stock market is historically choppy and given the strong run from November to March some back and forth action could be constructive.  We are also facing a contentious presidential election and the stock market could be choppy the closer we get to November.  

We expect areas of opportunity, even in the current economic environment.  When commodities and commodity-related stocks outperform, that trend often lasts for months and sometimes a few years.  We are also seeing buying opportunities in the global market for the first time in several years.  We plan to target portfolios to the asset classes and sectors which are outperforming in this current market.  

Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.