The abrupt shutdown of trading on Wall Street on the final day of April was a dramatic event that left investors and traders alike in shock. As if that wasn’t enough, the indexes had already been in negative territory before the final decline, which dropped them another percent, resulting in a month full of negative records. After an impressive year and even more significant returns in 2023, this sudden drop left many scratching their heads.
There are several factors contributing to this sudden drop, but one stands out in particular – inflation. Inflation has been a significant concern for economists and policymakers alike for years now, with record-breaking numbers in 2023 finally starting to level off thanks to the Fed’s high interest rate of 5.5% at the upper limit. However, earlier predictions of even six interest rate cuts have proven to be nothing more than fantasy. Historically, high interest rates can weigh heavily on companies’ profits and give investors safer alternatives that compete in the stock market.
The flagship index of the American stock market, the S&P 500, had its worst month since September 2023, with a decrease of over 4%. This is also the first month this year that the index has shown a negative return. On top of that, nine out of ten sectors were red, with only one showing a positive return – infrastructure stocks – which are considered relatively stable and durable even during times of crisis.
The Dow Jones fell by 5% in April – its sharpest decline since November 2018 – led by real estate and healthcare stocks. Even tech giants like Apple and Microsoft experienced a decline of over 4%. A mirror image can be seen in bond yields and US dollar values (DXY), which both rose sharply as well.
Several indicators suggest that the Federal Reserve’s fight against inflation has slowed down significantly. Wages have risen above expectations for Q1, further fueling inflation concerns among economists and policymakers alike. Leading US companies report that their consumers are being hit hard by rising prices as they continue to rise despite stagnant wages growth rate reported across all sectors except for leisure & hospitality sector which grew by average around +6% while others remained stagnant or decreased from last year levels such as Energy (-1%) or Information Technology (-4%) . Companies such as Walmart have reported declines in sales due to rising prices while trying to maintain profitability margins leading to cost cutting measures such as layoffs or closure of some stores across US states .
Given these challenges, it is unclear what lies ahead for policy makers led by Federal Reserve Chairman Jerome Powell who must balance inflation and growth while avoiding recession scenarios like “soft landing” scenario being difficult to achieve given current economic situation with persistent inflation cycle unprecedented creating significant challenge for policy makers..
