April’s Dismal Performance

April was a disappointing month for both the bond markets and the stock markets, with yields on the 10-year U.S. Treasury notes rising to the high 2% range and stocks in general slumping back to the previous lows established in mid-March. With the S&P 500 declining back to 4,100 and the TSX drawing down below 21,000 by the end of April, the two major indexes closed out the month in negative territory. April’s performance has been unsettling to say the least and it’s not surprising that the ‘R’ word (recession) is being thrown around more generously now as a possible outcome with GDP slowing in the western world, numerous cities under lockdown in China, and central banks aggressively raising rates due to rising inflation. On the surface, the outlook is beginning to look grim, despite the fact that earnings results have been positive. The markets are always a reflection of investor speculation of things to come and at the moment the future does not look bright. However, from a technical perspective, April’s lows could prove to be the bottom of a consolidation pattern proving the markets have successfully completed a retest of the previous lows. Historically, these moments in time are crucial inflections points that have signalled a turnaround to the upside. Only time will tell.  
 
Regardless, of the positive earnings results that companies have reported so far this year it has been chaotic for bond holders and a real source of anxiety for conservative investors as real rates on bonds (meaning nominal rates adjusted for inflation) have been negative.  Stocks in general have been negative too, with some exceptions like the energy sector, as fears of a slowing economy and rampant inflation cause investors to sit on the sidelines. This begs the question, is the stock market weakness simply a lack of buying pressure or are stocks in retreat due to economic weakness and overwhelming inflationary pressure? We would argue the former and suggest that perhaps it will take a couple rounds of interest rate hikes and another quarter of positive earnings to regain investor confidence. It’s also likely that earnings estimates need to be adjusted lower. Google’s earnings reported at the end of April are a perfect example. The company posted gross revenue growth of $68.01 billion but fell short of the $68.05 billion estimate. Although, gross revenue was up 23% year-over-ear, the miss represents a 6% drop in Q1 earnings. Google sighted YouTube’s miss as the reason for lower earnings, but this example proves our point regarding investor sentiment. There is extreme levels of bearish sentiment present among investors but corporate outlooks have been quite positive and even though the percentage of S&P 500 companies beating Q1 EPS is higher than average, investors are not rewarding positive earnings surprises. Clearly, there is a stark contrast between investor sentiment and management sentiment and therefore solid earnings are getting overshadowed. As a result, instead of investors buying on the dips the consensus seems to be selling the rallies instead.

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