April 2023 Market Lookback

Recession fears mounted to kick off the month, as economic indicators & soft data surprised to the downside. Treasury yields fell through the first week, but then trended higher as economic data improved. Stock market volatility was subdued in April, with the VIX remaining below 20 for the entire month — the first such month in two years. With over half of S&P 500 companies having reported, the earnings surprise rate currently stands at 7.7% — the highest since Q3 2021.

Macro

•   Job openings declined 632k in February to 9.931m — the lowest level since May 2021.

•   236k jobs were added in March — the 12th straight upside surprise.

•   Seasonal adjustment factors for jobless claims were updated on Apr 6, resulting in an upward revision to both initial & continuing claims.

•   Mar CPI came in below consensus on both a headline & core basis at 5.0% & 5.6% y/y and 0.1% & 0.4% m/m, respectively.

•   Against expectations for a m/m decline of 0.3%, home prices inched up 0.1% in February.

Equities

•   Bottom-up EPS estimates for the S&P 500 in 2023 remained steady at $220 in April.

•   With over half of S&P 500 companies having reported, earnings were 7.7% above consensus at month end — the highest positive surprise since Q3 2021.

•   Low volatility stocks beat their higher volatility counterparts by 4.2% in April in a reversal from the prior quarter when they underperformed by 13.9%.

•   Developed market international stocks outperformed US markets by 1.3%, buoyed by depreciating US Dollar effects.

•   The VIX finished the month at 15.8 and remained below 20 for all of April — the first such month in two years.

Fixed Income

•   Despite falling as low as 3.25% and rising as high as 3.63%, 10Y Treasury yields ended the month at 3.42%.

•   The near-term forward spread (i.e. spot 3mo Treasury yield – implied 3mo yield in 18 months) fell to -187bps on Apr 26, the deepest inversion of this cycle so far.

•   HY bond spreads ended the month basically where they began, widening from 5.02% to 5.03%, remaining below the 2023 peak of 5.55% that occurred during the mid-Mar volatility.

Crypto

•   Ethereum’s Shanghai upgrade was finalized on Apr 12, allowing for the withdrawal of coins that had been previously staked.

Earnings: What A Surprise

With over half of S&P 500 companies having reported so far, the earnings surprise rate sits at 7.7% as of May 1, nearly double the prior four-quarter average surprise of 4.2%. That’s not to say that earnings growth has been strong in an absolute sense – it is still tracking toward a second straight negative quarter. But compared to the downwardly revised expectations going into reporting season, earnings were better than expected. If the surprise rate were to stay at this level, it would be the highest surprise rate since Q3 2021.

What’s notable about this reporting season is that revenue hasn’t participated in the surprise fun. The revenue surprise rate sits at 2.1%, a touch below the prior four-quarter average of 2.3%. The implication is that this isn’t so much a story of a strong economy lifting the top line & flowing through to earnings, but one of pricing power, and so far, resilient company margins.

This makes sense given that multiple consumer staples companies reported double digit revenue growth despite flat volumes, while others cited the benefits of maintaining price increases despite declining cost pressures. It’s unlikely that companies’ current pricing power can persist longer-term. If anything, it could drive the Fed to be even more hawkish, eventually weighing on the economy & earnings.

Debt Ceiling Drama Set to Pick Up

As this earnings season eventually gets left in the rearview, the US debt ceiling standoff approaches. While it remains unclear when exactly the “X-date” – the day the US would officially default if the debt ceiling isn’t raised – would be, initial estimates pointed to it likely coming sometime before September, though not before June 5. However, weak tax receipts have led to cash at the Treasury General Account draining faster than originally anticipated, so risk is building that the X-date could come sooner rather than later.

Markets are clearly paying attention and getting nervous. Due to the certainty of maturity before any possible default, demand for 1m Treasurys soared. In fact, despite the fed funds rate target being currently set at 4.75-5.00%, the yield on 1m T-bills fell to 3.23% on Apr 20 (i.e. yields down = price up), while 3m yields were 5.05%. That spread of 182bps was the widest since 1m T-bills were first introduced in 2001.

Additionally, 1Y credit default swaps on the U.S. have surged in price and are now more than double what they were during the 2011 debt ceiling standoff. While the ceiling was eventually raised in 2011 before default, the country’s credit rating was downgraded and equity markets saw significant volatility. Though the current standoff could get resolved quickly, investors are pricing in a non-zero probability of default. Just as in 2011, such an event would almost certainly ratchet up market volatility, so it’s important to keep in mind as we get closer to the X-date.

Performance data quoted represents past performance. Past performance does not guarantee future results. Market returns will fluctuate, and current performance may be lower or higher than the standardized performance data quoted.