April was not kind to equity markets with the S&P 500 experiencing its worst month since the beginning of the pandemic. The S&P500 index declined 8.72% while the Nasdaq 100 lost 13.36%, its worst month since October 2008. The biggest headwind for the month seemed to be hawkish views from the Federal Reserve. The Futures market indicates that there is a 99% chance interest rates are within the range of 2.5-3.75% after the mid-December meeting. This would be the highest short-term interest rate in the US since 2008. In addition, the Fed is winding down its balance sheet. Fed Vice-Chair Lael Brainerd indicated that the Fed would begin shrinking its balance sheet at a “rapid pace”. Overall, the Fed will begin reducing their balance sheet at the rate of$95 billion per month beginning in May. In addition, Fed Chair Jay Powell suggested a more rapid pace of rate hikes while stating that a 0.50% increase in short term rates will be discussed at the May meeting. Inflation continues to be enemy number one as prices are increasing rapidly across the board.
As was the case for the first quarter, higher interest rates added to April volatility. An increase in rates acts as a damper on economic activity, thereby depressing equity prices. The 2-year Treasury yield is beginning to approach 3%, up 200 basis points since the beginning of the year. Yield increases in government bonds can raise the discount rate on equities and other risk assets subjecting these assets to greater possible losses. In sum, April produced a perfect storm of bad news for investors.
The Diversified Portfolio returned nearly 4% for April and is up approximately 5.5% year to date. This compares quite favorably to theS&P 500 which is down 12.92% for the year and the Nasdaq 100 which is down over 22%. We were pleased that our strategy held up so well in the face of a large decline in the markets we trade. In general, our equity timing models performed quite well posting positive returns across the board. Unfortunately,our relative value model was down slightly proving to be a slight drag on portfolio returns. This was primarily due to the model catching the first part of an 85% spike in volatility before going to cash. Regardless the overall portfolio not only protected principal during a month where capital preservation was paramount, it produced the welcome relief of positive returns.