April was a positive month for stocks, with broad equity categories gaining between 2-5.5%. These gains extended to large growth stocks which have experienced plenty of volatility this year. For the first four months of 2021, for example, the year-to-date returns on large growth stocks remained in the single digits. Their growth in April could be attributed to something we wrote about in last month’s client letter: interest rates.
Rising interest rates have been interrupted, as April saw the cessation of interest rate increases. Although there is a lack of clear evidence, investors generally believe that falling interest rates favor growth investments with far-off profit opportunities. After three straight months of increases, interest rates finally came down slightly in April. While this decline in interest rates could mean a brief pause in a larger, upward trend, for now, growth stock investors do not mind the outcome.
While the stock market and the economy are notoriously uncorrelated, it is important to pay attention to improvements. A number of bullish data releases indicate a continued strong economic recovery in the United States. A combination of stimulus measures and easing pandemic restrictions led domestic retail sales to soar 10% in March. Initial unemployment filings also plunged more than 24% compared to the prior month, and manufacturing and services surveys are detailing expansions. This was confirmed by the Bureau of Economic Analysis, which released its first estimate showing that the U.S. economy grew at an annualized rate of 6.4% during the first quarter of 2021.
With solid economic results forecasted, market participants are paying extra attention to potential Federal Reserve policy changes, which remain extremely accommodative despite the economic recovery. We, however, do not expect any such changes. As written previously, the Fed plans to act far later than they would have historically and does not want to tighten monetary conditions based on forecasts. Their most recent guidance predicts policy interest rates staying at zero through the end of 2023.
Whatever the future holds, we will continue to carefully monitor the situation and adjust both our stock and bond portfolios as conditions warrant. If there is anything we can help you with, please do not hesitate to reach out.