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May 1, 2024

Patience

Key Takeaways

  • U.S. economy appears healthy with strong labor trends, but reflation concerns have risen.
  • Market volatility has trended higher, which could present investment opportunities.

In April, investor resolve was tested with rising geopolitical tensions stemming from a series of military exchanges between Israel and Iran. While global markets retreated at first, they successfully absorbed the spreading Middle East conflict. Investors turned their focus back to favorable fundamental trends. However, new pricing data indicated that inflation might be heating up again, which prompted the Fed to convey the need for more patience to let its policy run its course.

Strong Employment Meets Stubborn Inflation

The U.S. employment backdrop continues to show remarkable strength. March nonfarm payrolls gained by 303k. The headline unemployment rate held at 3.8%1 and 12-month average wages increased by +4.1%1. Collectively the jobs data signals healthy consumer demand. However, first quarter GDP growth disappointed as did inflation. The Fed’s preferred PCE Price Index trended higher to 2.7%2, challenging the widely held view that the Fed’s 2% inflation goal was within reach. Markets are now pricing in only 1 to 2 rate cuts in 2024, in-line with our outlook. The U.S. is not alone on this front. Inflation has resurfaced around the world, presenting a dilemma for weaker economies.

Patience Amid Volatility
In April, the S&P 500 Index finished down (4.16%)3 bringing its year-to-date return to +5.57%3. The tech heavy NASDAQ Composite Index and the small-cap Russell 2000 Index fell by (4.39%)3 and (6.72%)3 respectively. Overseas equities fared better with the MSCI EAFE Index declining (1.58%)3 and the MSCI Emerging Markets Index rising +1.06%3. Crude oil prices fell to start the month but have since recovered ending up +0.51%3. Perhaps less visible was evidence of increasing market volatility. The CBOE Volatility Index (VIX), known widely as the “Fear Gauge,” rose to 15.4 and is up +18.22%3 in April. At this level, the VIX still remains below its 20-year historical average of 19.13. However, volatility extended beyond equities to fixed income, which exhibited higher volatility as the yields of longer-dated Treasury securities rose. The 10-year U.S. Treasury yield stood at 4.68%3 by month-end and is now up +79bps year-to-date. The Merrill Lynch Options Volatility Estimate (MOVE) Index, a measure of bond market volatility, is now up +22.04%3 for the month to 105.43 and sits above its 20-year historical average of 84.93. We are closely monitoring this development as its continuation could negatively impact near-term equity returns. We maintain our positive stance on U.S. equities and will look for ways to capitalize on meaningful pullbacks. With fixed income, we remain neutral toward duration due to rising volatility and inflation, and the risk of weakening Treasury demand amid greater supply. Irrespective of market environment, we will continue to invest according to our patient and strategic asset allocation discipline, in order to protect against downside scenarios and participate in up markets.

Sources: Members Trust Company Research, Bureau Labor of Statistics1, Bureau of Economic Analysis2, Refinitiv Data3

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