The S&P 500 Index delivered a -4.1% return in April 2024. The performance of the Inflation Protection Model Portfolio was -4.5%. Portfolio returns are calculated on a weighted average basis and take into account the repositioning of the portfolio early in the month, including the addition of Royal Gold (RGLD).
As we noted in our April 4 update, Lamb Weston (LW) reported a significant impact from an enterprise software transition, which sent the shares plunging. At the time, we expressed our view that this was an overreaction. Over the course of the rest of the month, LW shares traded up approximately 2%, while the S&P 500 traded down approximately 2%.
The unexpected setback from LW significantly impacted portfolio returns and accounted for nearly half the decline. Excluding the impact of LW, the portfolio performed relatively well and materially outperformed the S&P 500 Index. Commodity-related investments in particular helped protect portfolio returns during the month.
Across the portfolio, individual position returns ranged from -22% for LW to 7% for Freeport-McMoRan (FCX).
April was a difficult month for stocks, which had climbed steadily since the beginning of the year. In mid-March, we had talked about the Fed’s apparent indifference to relatively hot inflation readings that have been surfacing over the course of the year. The market rallied through the end of March after the Fed signaled that rate cuts were still in the cards.
Over the course of April, additional economic data points came through that suggested the Fed will not be able to maintain its dovish posture. Implied expectations for rate cuts over the course of the year began to diminish, and long-term Treasury yields backed up significantly.
The month of April concluded with a hot Employment Cost Index reading. Wages and benefits grew at a 1.2% pace in the first quarter of 2024, which was the highest reading since the first quarter of 2023. While this is good news for wage earners who are struggling to close the gap on post-pandemic cost of living increases, it is bad news from the standpoint of the broader battle against inflation.
Wage inflation tends to be sticky and represents a key component of the overall inflation calculation. With employment costs still growing close to 5% annualized, the path to 2% targeted inflation rates is challenged. Bond investors have taken note as 10-year Treasury yields backed up nearly 0.5% over the course of April, moving from approximately 4.2% to 4.7%.
Dissipating hopes for rate cuts and rising long-term rates weighed on stocks, while a number of commodities have performed well as the inflation narrative lingers. As the S&P 500 and Treasuries declined in April, the Dow Jones Commodity Index had a positive month.
