April is usually a good month for markets. Historically, it is one of the three best months of the year for equities. We all know what happens in May (‘sell in May and go away’) but we will worry about that later.
Over in the bond market, the bond vigilantes may have started to doubt their conviction that inflation is a fait accompli and so yields must go up. This week, yields declined a bit, which gave a boost to some sectors (gold and silver, for example), while banks pulled back a little. But Friday’s Producer Price Index report for March reversed that. PPI was up 1% versus expectations that were only half that, which brings the year-over-year gain to 4.3%.
After the report, precious metals fell back, banks rallied, and the U.S. dollar gained along with bond yields. But for long term investors these weekly, and even monthly, government reports should be taken with a grain of salt. The Fed has said that they expect that, over the short-term, the inflation rate will rise, but not nearly enough to cause any risk of runaway inflation.
This week’s sector rotation among the day traders was to sell out of the re-opening stocks and back into large cap technology. Like gold and silver, readers should know that higher interest rates provide a headwind for the technology sector. As such, it makes sense that NASDAQ outperformed both the Dow and the S&P 500 Index this week. But the tech-heavy NASDAQ is still below its old highs, while the Dow and S&P 500 Indexes have been making new highs. I expect that technology overall and the FANG stocks could play catch-up with the other averages this month.
The Biden Administration’s infrastructure proposal also influenced trading. The president’s willingness to compromise on the corporate tax rate, plus his invitation to talk with Republicans about the package overall, helped sentiment. That, in turn, pushed the benchmark S&P 500 Index to new highs as well as the Dow. In the meantime, the Russel 2000 small-cap index has taken a back seat to the main averages.
In this rotation-prone market, investors have been taking profits in the small-cap arena. There is some justification for this selling. Medical experts have been advising caution over the short-term due to a possible third wave of the coronavirus. This has fueled fears among traders that sporadic shutdowns could occur across America. If so, that could impact smaller companies more than larger concerns.
In addition, there has been a noted slow-down in retail participation in the small cap arena lately. Wall Street analysts were predicting that at least half of the latest stimulus checks would find their way into that retail-favored market. That was a bad bet, since the opposite seems to have occurred.
Instead, retail investors have paid down debt with their government windfall. Times are changing as well. As the country gets vaccinated, and more and more new opportunities present themselves (reopening restaurants, movies, gyms, etc.), individuals are no longer confined to day trading on their computer screens.
I expect stocks to continue to climb this month, supported by good news on the earnings front and the expectation that the economy is gathering steam. Outside of the U.S., Europe and the lesser-developed areas, emerging markets hold promise. Emerging markets have had substantial corrections during the last two months and seem ripe for buying, in my opinion, especially if the greenback continues to decline.