The Monthly Review: April

In April, the S&P 500 index took a brief pause after a strong positive streak, likely due to Powell's comments about concerns over progress toward the 2% inflation target, which postponed interest rate cuts. The U.S. ten-year Treasury bond also saw a correction, with yields rising from 4.2% to 4.7% and a corresponding 5% drop in T-bond futures prices.

However, early May brought a shift as macro data indicated a deterioration in the U.S. economy, particularly with ISM indices falling below 50 and disappointing unemployment claims. Surprisingly, this bad news was celebrated by traders, pushing the S&P 500 back near its highs and the ten-year yield around 4.5%. This reflects a "bad news is good news" mentality, which has historically not proven to be a sound investment strategy.

While the earnings season has been strong, with average earnings exceeding forecasts by about 5%, much of this was already priced in, and companies reporting below expectations faced significant penalties. Despite this, the American economy's past resilience and the lack of a feared recession support bullish sentiment.

Current market conditions are complex, with geopolitical tensions, persistent inflation, a record global election year, and high interest rates complicating stock valuations. The author believes that long-short equity managers may regain popularity in this challenging environment, as they are performing well in 2024 after years of difficulty for passive investments.

On the bond side, the author sees the short-term high-yield sector as offering an excellent risk-reward ratio, especially with professionals conducting proper credit risk analysis. While May is traditionally a good month to reduce risk, the current market remains calm.