Spring has unofficially sprung! The month of April signifies regeneration and renewal, ushering in hope and optimism for sunny skies ahead (and the occasional rain shower). Winter’s frost is long gone, and our thoughts turn to baseball, backyard BBQ, and beautiful days. This bright outlook is on full display in the stock market, where April turned in another positive month, its third of four in 2023.
US markets were up by low single digits in April, with the S&P500 delivering a respectable gain of 1.56%. This extension of the year-to-date rally is itself an extension of the rally off the cycle low last October. Good news and a welcome reprieve which implies that things may not be as bad as the headlines suggest. This is evident in Q1 earnings data, which continue to come in better than expected, and well above analyst predictions. With roughly ¾ of companies having reported as of this writing, over 70% have beaten earnings estimates and 65% have beaten revenue estimates. Surprises – both in terms of revenue and earnings – have been positive by an average of 6.2%, and profit margins remain strong.
Continuing in the “not as bad as headlines suggest” category, economic data remain sound. Unemployment hovers at a near 55-year low, and while job growth was down from prior months, it is still at a healthy level. Consumer confidence actually rose on the margin, with spending showing impressive resilience as consumption continues its shift from primarily big-ticket goods to services and consumer staples. Business confidence is still in the green and GDP growth for the first quarter, while slightly weaker than expected, came in positive. Overall, the news is not that bad and happily much better than we expected.
While the outlook remains positive, there are still risks. The biggest is the debt ceiling confrontation, which keeps getting closer. The most recent estimate of the so-called X-Date, when the US Treasury will run out of cash, is somewhere in June or July. Early revenue data, which has shown lower collected tax receipts, suggests the X-Date could indeed be at the beginning part of that range, which means the government needs to achieve a resolution sooner rather than later. In that spirit, President Biden plans to meet with congressional lawmakers on both sides of the aisle in early May, hoping to sidestep the contentious and heated negotiation process that most pundits expect. In order to avoid a partial or full government shutdown – and the technical default of its financial obligations – the government must solve the debt ceiling issue one way or another, which is what we expect to happen.
Which path do we take from here? Financial markets, notably equities, have shown impressive resilience in the face of a slew of risk and uncertainty. The S&P500’s return of nearly +10% through April would be a great annual gain by anyone’s measure. There is a clear path to the upside as we peek ahead to Memorial Day weekend and beyond. Yet risks do remain, from the ongoing banking upheaval to the debt ceiling crisis to the Federal Reserve’s interest rate hiking campaign to the elusive recession. While some or none of these risks may eventually come to pass, and the economy could ultimately achieve the highly sought-after soft-landing scenario, it makes sense to be aware and prepared for whatever markets may throw our way. Rain or shine, stormy or calm, we will continue to monitor developments as they arise.
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged, and investors cannot invest directly into an index.