The spring months of April and May can bring fickle weather with sudden swings in temperature where we’re freezing one day and ready to head for the pool the next. As soon as the calendar flipped into April, equity markets started to head down, jolting investors into a new season of weakness that we hadn’t seen in six months. We suddenly went from hot back to cold with April bringing us the first negative month since October of last year.
The major U.S. indices were all down 4-5% for the month. Mid-cap and small-cap stocks suffered even more, falling 6-7%. Foreign stocks were negative as well, though they held up better than their U.S. counterparts.
On the fixed income side, the broader bond market slumped as yields rose significantly during the month of April, though high yield corporate bonds fared better than high-quality bonds. Some areas of the bond market bucked the overall trend and showed positive returns in April, and we have exposure to these areas in the Income and Income & Growth strategies.
Not all segments of the markets showed negative returns in April. Precious metals and commodities built on their strength from March and managed to post positive returns in April. It turned out to be short-lived, though, as these areas succumbed to weakness around the middle of the month.
April was a big month for earnings reports. According to FactSet, 77% of S&P 500 companies reported a positive earnings surprise for the first quarter. However, earnings guidance for the 2nd quarter was mixed, perhaps adding to uncertainty in the markets as we enter an historically weak period (May to October) for stocks.
Overall, as market slumps go, April gave investors a standard 5% pullback, something that is normal and healthy in market cycles. A Reuters article from April 22 cited a Bank of America analysis that found the S&P 500 has had an average of three pullbacks of 5% or more every year since 1929.
The prospect of Fed rate cuts keeps getting pushed later into the year as economic data has shown stubbornly sticky inflation. While this has been the catalyst for April’s market slump, one could argue that the equity markets were “due” for a retreat after the strong rally we’ve had from the end of October to the end of March. Of course, we will be watching to see if stocks can bounce back and reverse the April decline. If the malaise continues and fulfills the historical “sell in May” precedent, however, we will take more action than we already have in the portfolios.
Portfolio Changes in April
While the main tenet of FSA’s investment process is to protect portfolios in market downturns, a relatively minor move of 5% to the downside generally will not lead us to raise cash in our most aggressive, equity-oriented strategies. However, FSA moves more quickly in our most conservative strategies to preserve gains when price trends reverse.
The following summarizes the activity in April for the strategies that employ the FSA Safety Net®:
- Portfolios in Core Equity and Tactical Growth had no changes in their overall allocation as these strategies remained fully invested throughout April. As a result, the portfolios will fully participate if the equity market regains its footing and resumes an uptrend in May. But rest assured, if the weakness in April turns into a more serious slide, we will look to mitigate the impact of a further decline.
- Portfolios in Income & Growth and Conservative Growth experienced the most activity. In Income & Growth, we reduced equity exposure to 30% and raised money market levels to 25%. Similarly, in Conservative Growth, we reduced equity exposure to 65% and raised money market levels to 15%. While these portfolios won’t capture as much upside as those in Core Equity and Tactical Growth if stocks head back up, these conservatively managed portfolios will be more cushioned against a further drop should stock and bond prices continue lower.
- Portfolios in the Income strategy had less activity as some areas of the bond market held up well and helped to offset other areas that lagged. However, we did slightly reduce bond exposure to 90% by exiting the weak areas, and we raised money market levels to 10%. With money market yields north of 5%, we are comfortable with having an allocation to this asset for the time being.
As we transition from spring into the summer months, may you experience warmer days with less fickle temperature changes.
Mary Ann Drucker
Assistant Portfolio Manager
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