April market recap

The U.S. stock market continued to do well in April, amid the promise that widespread COVID-19 inoculations will enable the economy to remain on a recovery path. The S&P 500 Index was up more than 5% for the month.1

The market did react negatively during the month to news that President Biden plans to increase the tax on capital gains to 39.6% from 20% for those Americans who earn more than $1 million. The higher capital gains tax rate is being offered as a way to help fund the $1-trillion American Families Plan, which includes measures to help U.S. workers learn new skills, expand subsidies for childcare, and make community college tuition free for all. That legislative proposal came on the heels of the American Jobs Plan, announced earlier in the month, which would spend $2 trillion on infrastructure. It will take some months for Congress to debate these plans and determine the final scope of any legislation.

Inflation is on the rise

Inflation is ticking up, as the Consumer Price Index (CPI) jumped 0.6% in March, according to a report from the U.S. Bureau of Labor Statistics issued on April 13.2 The rising price of oil was a big contributor to that increase. Some economists had expected a 0.5% increase in the CPI. The rate of inflation over the past year shot up to 2.6%, the highest level that inflation has been since the fall of 2018.

Inflation could continue to rise over the next few months. A chief reason is a faster U.S. economic recovery, fueled by massive fiscal stimulus and a sharp drop in new coronavirus cases. Both are boosting demand for a wide array of goods and services at a time when many key materials are in short supply.

The Fed decides to hold steady with U.S. interest rates.

On Wednesday, April 28, the U.S. Federal Reserve concluded its Federal Open Market Committee (FOMC) meeting and announced it would keep its benchmark interest rate near zero. It was a widely expected decision. The Fed also gave no indication it would change its policy anytime soon.

Fed Chair Jerome Powell acknowledged that the economy is improving and inflation is on the rise, but he noted that the recovery is still “uneven and far from complete.”

While recognizing that inflationary pressures could increase in the coming months, Chair Powell explained the Fed’s view is that these “one-time increases in prices are likely to only have transitory effects on inflation.”

Concerns about inflation remain high. But it remains to be seen whether the Fed is right, and the current spikes will be short-lived because they are caused only by the reopening and supply constraints, or if the Fed is misreading current conditions and higher inflation proves to be a longer-term phenomenon.

As the Fed has noted in the past, it believes a robust economy with an inflation rate of 2% over the long-term can support its goals of maximum employment and stable prices. In our view, it remains a question as to whether the Fed could act quickly enough to address the problem if it looks like inflation is ready to surge above that level for the long term.

As part of its accommodative monetary policy, the Fed continues to buy at least $120 billion of bonds each month and believes there are no reasons yet to begin curtailing this program.

In its statement at the conclusion of the meeting, the FOMC noted that the direction of the U.S. economy remains largely dependent on the progress the country makes with addressing the pandemic. The good news on that front is that the daily number of new COVID-19 cases has declined by more than 5% in 34 states, as the U.S. is now delivering an average of 2.7 million vaccinations per day.3

The economy grew at annual rate of 6.4% in Q1

Gross domestic product (GDP) for the first three months of 2021 surged at annual rate of 6.4%, according to a U.S. Commerce Department report issued at the end of April.4 Aside from the reopening-fueled gain in the third quarter of last year, it was the best economic growth rate the U.S. has seen since the third quarter of 2003.

The U.S. Labor Department also reported that initial jobless claims for the week ending April 24 fell to 553,000.5 It was the third straight week of declines and the lowest level of new unemployment claims since the start of the pandemic.

Consumers, who drive 68.2% of the U.S. economy, accelerated their spending by 10.7% in the quarter, a significant step up from the 2.3% increase in the fourth quarter of 2020.4

That spike in spending was certainly helped by the $1,400 stimulus checks the government sent to taxpayers. Still, consumers don’t appear to be spending all of the COVID-19 relief money they’ve received. The personal savings rate for the first quarter climbed to 21%, up from 13% in Q4.4

Trade has been the one major remaining drag on the economy. That stems from the fact that the United States is well ahead of many other countries in the pace of its recovery. While American consumers are ready and able to spend more, the rest of the world does not appear to be there yet.

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Tags: Inflation, Interest rates, Volatility