Trust Investment Management
April was a difficult month for both fixed income and equites. U.S. large cap, small cap, and developed international fell by 4.08%, 7.04%, and 2.56%, respectively. Emerging markets managed to trend higher with a small but positive return. Fixed income asset classes were down, pressured by rising yields during the month. The broad headwinds were primarily caused by stubborn inflation, and consequently, a more hawkish Fed. Expectations for the first rate cut were disappointingly pushed out to later this year.
While core CPI, and core PCE (the Fed’s favored inflation gauge) held steady on a year-over-year basis, the inflation numbers were expected to decline in April. The latest Core PCE numbers released in April rose by 0.3%, or 2.8% from one year ago. Inflation seems to have stopped trending down causing concern that the Fed will leave rates elevated for longer, increasing the likelihood of a recession.
In the FOMC statement released on May 1st, the committee indicated that recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. The statement was clear—rate cuts are unlikely for at least several months.
While rates will continue to be restrictive to our economy, the probability of a recession in 1 year declined to 55% (down from 64% in March, and 65% in February), according to the Federal Reserve Bank of Cleveland. Inflation, and adjustments to the expectations that the Fed will change rates have been the central focus for investors over the last couple of years. This will likely continue until inflation cools and the Fed can lower rates back to the neutral rate of interest, hopefully without the aid of a recession.
