Stock Market Outlook for April 2021

 

One year after the devastating Covid-19 crash rocked the U.S. stock market, the S&P 500 concluded March by reaching a new all-time high. In total, the U.S. benchmark index has surged by more than 77% since hitting its lowest point in March 2020. However, the path to this record high in March was not without its bumps. Concerns regarding potential inflation spikes, rising bond yields, and the downfall of Archegos Capital, an investment fund, contributed to noticeable volatility in stock prices. Despite these concerns, the year has started strong, with both the Dow Jones Industrial Average and the S&P 500 reporting their fourth consecutive quarter of gains, rising by 7.8% and 5.8% in the first quarter of 2020, respectively. As investors look to April, they are eager for concrete evidence that the economic recovery is firmly underway. Earnings season, a multi-week period during which public companies disclose their quarterly results, is set to begin in mid-April. Investors are hopeful that the positive momentum from the fourth quarter of 2020 will carry over, according to Tim Courtney, the Chief Investment Officer of Exencial Wealth Advisors. “The market has gone about as far as it can on hope; it’s kind of kicking around and we’re waiting for the data to come in,” he says. “The good news is that everything is progressing in a very similar way to the way the market had envisioned.” Historically, April has been the second-strongest month for stock market performance on average. Alongside earnings reports, market-moving developments could arise from the ongoing Covid-19 vaccine distribution and the gradual reopening of the economy, actions taken by the Federal Reserve, or concerns surrounding inflation.

Progress on the Path to Normalcy:

As of late March, approximately one-third of the U.S. adult population has received at least one dose of a Covid-19 vaccine. Amidst the steady stream of monthly economic reports, investors are looking ahead to an emerging sense of normality, explains Lamar Villere, partner and portfolio manager with Villere & Co. “Investors seem to be shrugging off most economic indicators with an eye on: ‘Hey, we’re a month or so away from being completely back to normal,'” says Villere. He does, however, caution that this optimism is contingent on no significant uptick in Covid-19 cases. “The market seems to be telling you that what’s happening today doesn’t matter so much if tomorrow is going to be fine.” The accelerating vaccine distribution and the new federal stimulus package are expected to boost consumer confidence and lead to increased spending. This, in turn, could benefit sectors such as restaurants, travel, leisure companies, and hotels, among others. “We’re starting to see some type of return for those beaten-down sectors,” Courtney adds.

Potential for Increased Economic Stimulus:

President Joe Biden recently unveiled details of the American Jobs Plan, a $2 trillion-plus infrastructure and economic recovery package. The political negotiations surrounding this proposal will be closely monitored in the coming month. The spending associated with this plan will be a focal point for market participants. Courtney notes, “I don’t think the market is really focusing too much on the debt and tax increases that are likely to come as a result of that spending.”

Banking on Earnings Season:

Earnings season commences in mid-April, with publicly traded companies reporting their first-quarter results. Alongside the weekly jobless claims and the April 2 release of the monthly jobs report, these reports are crucial for market participants, as Brooke May, CFP, managing partner at Evans May Wealth, emphasizes. “Earnings expectations are very high for this year, and we’re going to need to see companies deliver on the earnings projections,” says May. Companies that have attracted significant attention in recent months may face sell-offs if they fail to demonstrate sustainable business models or strong earnings growth. Moreover, there is a risk that corporate earnings may disappoint, failing to provide the confirmation of the economic recovery that many investors anticipate, notes Courtney. “This is the month where we want to see the proof; that’s it in a nutshell.” For the first quarter, Wall Street analysts currently project that S&P 500 members will report the highest year-over-year earnings growth since the third quarter of 2018, according to FactSet. If companies indeed exhibit accelerated earnings compared to the fourth quarter, it could be a short-term catalyst for a market upswing, says Courtney. In such a scenario, value stocks, small-cap equities, and economically sensitive sectors are likely to outperform the broader market.

Inflation and the Federal Reserve:

Inflation has been a focal point in recent market discussions. Although consumer prices have ticked upward in recent months, the rise in inflation remains moderate. Federal Reserve Chair Jerome Powell has dismissed concerns about long-lasting, elevated inflation. “Inflation has become a headline that has gotten a lot of attention, and we don’t fear runaway inflation,” says May. She explains that even if interest rates continue to climb modestly, it does not necessarily imply the imminent arrival of high inflation. Powell has consistently stated that the central bank will not raise the benchmark federal funds rate until there is substantial evidence of a robust U.S. economy, characterized by maximum employment and inflation surpassing its short-term 2% goal. As a result, the likelihood of a rate hike at the Federal Reserve’s upcoming meeting on April 27 and 28 is estimated to be low. However, the meeting will be closely watched for any hints regarding future rate hikes. Villere suggests that policymakers are well aware of investor expectations. “As long as they move very slowly and carefully, the market is going to do fine.”

The Great Rotation:

A market rotation that began several months ago may continue into April and beyond. In March, value stocks outperformed growth stocks year-to-date by the widest margin since 2001. Villere and his colleagues, who primarily invest in growth stocks, are transitioning into value stocks due to their more attractive valuations and potential for significant gains. May, on the other hand, adopts a more nuanced approach to the apparent market rotation, emphasizing that some growth stocks may continue to perform well while certain value stocks may warrant a selloff. “There’s a change in leadership going on right now in stocks, with investors moving away from companies that were high flyers over the last year and looking more at companies that have sustainable business models,” notes May.

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