Global stocks and bonds lost value in April as interest rates rose and expectations grew for more aggressive actions from central banks to restrict inflation. Many now expect U.S. short-term rates to be around 3% by year end. While possible, we suspect this may prove exaggerated, especially if the economy or equity markets show signs of softening. If so, it could provide a cushion to stocks and would help bonds recover.
Future interest rates remain highly uncertain, but there is little doubt about the current direction. Ten-Year Treasury yields began the month at 2.3% and approached 3% by the end of it. 30-Year Mortgage rates shot past 5%, reducing affordability and making a decline in home prices over the remainder of the year an increasingly likely possibility.
Earnings results so far this spring have been generally strong, but misses have been met harshly, especially in growth stocks. Netflix grabbed the most unwanted attention, with shares losing almost half of their value in April after announcing its first decline in subscribers in a decade. Online media companies in general had a rough month with Alphabet (Google), Meta (Facebook) and Disney all falling more than the overall market.
The prospect of higher rates has caused many investors to rethink their infatuation with growth stocks. The Nasdaq 100 (QQQ) was down over 13% in April and is hovering around bear market territory for the year. Many pandemic-era growth favorites have seen shares plummet by well over 50% from their peak. Recently, we’ve seen contagion into previously invincible mega cap growth stocks, with some lagging major indexes for the year. So far, Apple and Microsoft, the two biggest, have performed similarly to the overall market.
When style rotations occur, or sector bubbles pop, they often overcorrect. Currently, many exciting growth companies suddenly have valuations that seem quite reasonable. While they can be tempting, we continue to recommend a diversified style approach, slowly adding to whichever style is out of favor. “It can’t go down more” often proves to be quite wrong.