We just experienced the stock market's worst quarter since the COVID-19 pandemic started. But is there finally some relief on the horizon?
While the market does appear to be trending up in the past couple of weeks, it's impossible to say that it will be smooth sailing from here. The best you can do as you manage your investment portfolio this month is to consider three major themes that will likely affect the market in April.
1. The stock market will calm down a bit in April
The first quarter was kinda crazy, but a much-needed breather could be in the cards for April. Inflation and monetary policy were in focus over the past few months, as the Federal Reserve communicated a plan for aggressive interest rate hikes to combat rising prices across the economy. Geopolitical issues and the Russia-Ukraine war also caused serious volatility in the commodity and stock markets. We also had fourth-quarter earnings season, which revealed strong overall performance paired with a less inspiring outlook for the full year.
Last quarter, uncertainty hung over a stock market with historically high valuation, which fueled volatility. The CBOE S&P 500 Volatility Index hit 52-week highs in the early part of the month. Many of the past few months' trading days saw major indexes charge and retreat well over a full percentage point. Enormous swings in market value are starting to seem normal.
The factors that drove high volatility are far from resolved, but the market seems to have digested most of the news. First-quarter earnings season starts back up in the middle of April, but the deluge of corporate results doesn't really hit until May. The VIX is back down to around 20 right now (after getting as high as 38.9 in early March). That level is higher than it's been for the past year or so, but it's fairly average over long-term market history. All signs indicate that investors can look forward to an April stock market that's not quite as wild as the first quarter.
To be clear — this isn't a prediction on the direction of the market. The market could move up or down over the next few weeks, but the day-to-day swings should be less intense.
2. Early earning reports will get major attention
By the time first-quarter earnings season starts, nearly a month will have passed since the last major stock market news. Investors are still on edge due to high valuations and economic uncertainty, so there could be a strong reaction to any noteworthy results from the first handful of stocks that report quarterly results.
Financial stocks and transportation stocks are likely to get a lot of attention in April. Banks are important facilitators of economic activity, so investors will be eager to hear updates as those businesses react to rising interest rates and uncertain economic conditions. Railroads and other freight carriers are important bellwethers that can provide clues on the level of activity in numerous sectors. That's useful information on aggregate demand and the state of supply chain disruptions.
Airline stocks will be another huge focus. It's a large and cyclical industry that can move the market on its own. Airlines also tell investors a lot about business activity, the impact of rising energy prices, and consumer discretionary spending amid high inflation rates. After a few relatively calm weeks early in the month, some of these bellwethers could fuel volatility.
3. Dispersion will fall, but it isn't going away
“Dispersion” refers to the variation in performance across different stocks in the market. In other words, the gap between winners and losers. Bull markets typically have low dispersion, because the rising tide is lifting almost every boat. Steep market crashes can also have low dispersion if capital is moving away from stocks as a whole.
High dispersion is an ideal environment for stock-pickers and investors with more active strategies. These are the times that can really separate winners from losers.
We usually see dispersion near the top and bottom of markets, and it's been relatively high in recent months. Growth stocks continue to tumble from unsustainably high valuations, while value stocks and dividend stocks have held up relatively well. That's driving dispersion across sectors and industries.
We're also seeing investors react drastically to different companies' outlooks. Some stocks are sinking as they struggle with pricing pressure, supply chain issues, labor shortages, and slowing growth due to weak demand. Other stocks are enjoying business as usual and have adeptly reacted to the major challenges in their way.
Investors will remain discerning in April, but the impact should be reduced if volatility falls in the absence of major market-moving news. Don't be shocked to see high dispersion return later in April and into May. The variation in results among stocks should be lower early this month than it was in the first quarter.
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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.