Surging inflation has fueled concerns that the Federal Reserve is becoming more hawkish.
These fears weighed on markets in April, driving U.S. equity indices down over 4% for the month (but still positive on the year), while international developed markets were down a bit less, and emerging markets managed to eke out a slightly positive result. Fixed-income performance was also negative, as yields climbed higher during the month. On the other hand, commodities continued to post strong performance, led by industrial metals.
Returns % as of 4/30/24
Equity markets pulled back from Q1’s hot start.
Fresh data has dimmed hopes for interest rate cuts and yields spiked higher.
Equity risk factors were mixed for the month. Value was a positive contributor across all markets, while Minimum Volatility strategies held up well relative to market beta in the United States and international developed markets. Small-cap exposure struggled—except for Emerging Markets, where it led all factors.4
Despite a recent slowdown in inflation, the first quarter has seen a resurgence, which has postponed any potential rate reductions. The Fed is tasked with the delicate balance of managing two risks—one of easing too quickly and allowing inflation to embed above its 2% target, and the other of delaying until the economy buckles under high rates.
The Fed, acknowledging a setback in its battle against inflation, has signaled that it will likely maintain current interest rates longer than anticipated. After a series of economic data unveiling persistent price pressures, officials resolved to hold the benchmark federal funds rate steady at a range between 5.25% and 5.5%, the highest level in two decades. Federal Reserve Chair Jerome Powell has suggested that the benchmark for reducing interest rates has risen.
The central bank also approved decelerating the ongoing reduction of its $7.4 trillion asset portfolio, reflecting an effort to prolong the winding down of the emergency pandemic stimulus measures initiated four years ago.5
Since the late 1990s, the number of U.S. publicly traded companies has significantly decreased, from around 8,000 in 1996 to approximately 4,600 in 2022. A 2023 research paper attributes this trend primarily to mergers and acquisitions (M&A), fueled chiefly by seven major companies—the “Magnificent Seven,” comprised of Alphabet, Amazon, Apple, Google, Meta, Microsoft, and Nvidia.
These giant tech corporations have acquired around 875 companies since the late 1990s. Significant acquisitions include Fitbit, Instagram, LinkedIn, Whole Foods, and YouTube. Had these companies not been absorbed by the tech giants, they might have been robust, stand-alone, publicly traded businesses today.
The paper raises concerns about the implications of reducing publicly traded companies for the broader economy. It suggests that consolidating them under one roof may add to the market’s overall volatility when a handful of stocks swing in one direction or another.6
One of the greatest challenges for investors is focusing solely on their investment strategy and performance toward their benchmarks, as opposed to comparing their performance with others. A recent study from Ben Gurion University found that investor behavior is skewed by such comparisons, even when investors are leading the group, causing them to take unnecessary risks—which can ultimately result in overall performance that lags the overall market.
We believe the recipe for long-term success is taking a thoughtful, Evidence-Based approach to building your portfolio—informed by your well-defined goals—and then monitoring it against your benchmarks while avoiding the temptation to compare it against others.
1 Morningstar Direct as of March 30, 2024
2 S&P Dow Jones Indices data as of April 30, 2024
3 Morningstar Direct as of March 30, 2024
4 Morningstar Direct as of March 30, 2024
5 Timiraos, N., “Fed Says Inflation Progress Has Stalled and Extends Wait-and-See Rate Stance,” Wall Street Journal, May 1, 2024. https://www.wsj.com/economy/central-banking/fed-says-inflation-progress-has-stalled-and-extends-wait-and-see-rate-stance-51b74bbf
6 Lattanzio, G., Megginson, W.L., and Sanati, A. “Dissecting the Listing Gap: Mergers, Private Equity, or Regulation?” Journal of Financial Markets, Forthcoming, April 11, 2023. Available at SSRN: https://ssrn.com/abstract=3329555 or http://dx.doi.org/10.2139/ssrn.3329555
7 Afik, Z., Dafna, H.H., and Lahave, Y., “Winners, Losers, and Others in Investment Competition – Experimental Study.” Available at SSRN: https://ssrn.com/abstract=4560089 or http://dx.doi.org/10.2139/ssrn.4560089
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