Asset class recap for April
April was a bad month for most asset classes in our table below. During April, U.S. stocks gave back a large part of the Year-to-Date returns they had accumulated between January 1 and March 31. Emerging Markets Stocks were a bright spot with a positive return, demonstrating their value as a diversifier.
Interest rates were the most impactful factor that put a drag on returns in April, as the yield on the 10-year Treasury note climbed from 4.21% on March 31 to 4.67% on April 30. Investors are still coming to terms with the idea that the U.S. Federal Reserve is very unlikely to lower rates significantly in 2024. The yield curve is slowly “baking in” that expectation, with interest-rate-sensitive assets dropping in price.
The chart below shows the daily price for the S&P 500 Index during April (in blue, axis on left) and the yield on the 10 Year Treasury Note (in orange, axis on right). It is clear to see the continuing strong negative correlation between the two. This overbearing linkage is likely to continue and cause further broad market volatility until more consensus is shared about the “right” level of long-term interest rates for U.S. markets.
Emerging Markets stocks had a positive month in April, outperforming other broad equity asset classes we track. China and India receive the largest allocations in many Emerging Markets stock indexes. iShares.com reports that the iShares MSCI China ETF returned 5.4% in April, while the iShares MSCI India ETF returned 1.3%. These countries saw stock prices jump for a mix of macroeconomic and local regulatory reasons. With average price-to-earnings (P/E) ratios for Emerging Markets equities below 14, and the average P/E ratio for the S&P 500 index above 24 last month, it didn’t take much good news for Emerging Markets stocks to see a relative price pop.
Among U.S. Equity Sectors, Utilities performed best in April, with the S&P 500 Sector Utilities Index returning 1.6%, which was 5.7% ahead of the S&P 500 Index’s -4.1%. This outperformance was primarily the result of two things.
- Energy prices dropped during April. In particular, on April 16, a couple days after Iran launched aerial strikes on Israel, Israel’s response was restrained. Oil prices dropped, and prices for the largest utilities jumped.
- Some investors have come to expect that high demand for electricity from growing data centers and energy hungry artificial intelligence processing may create a meaningful amount of new demand for energy and lead to new profits for utilities. This was another market segment that was poised for a rebound, as the Utilities sector has the second lowest 5 year return among all 11 S&P 500 sectors (only Real Estate has produced lower returns).
The chart below shows cumulative returns during April for the three largest Utility stock holdings in State Street’s Utilities Select Sector SPDR ETF Fund (ticker: XLU); NextEra Energy Inc, Southern Co, and Duke Energy Corp. The chart also includes State Street’s SPDR S&P 500 ETF Trust (ticker: SPY) and WTI Oil for comparison. On April 16, prices for Utilities stocks started a multi-week run while oil prices started dropping.
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