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April Economic Update

Market Summary

March was a tale of two halves as stocks moved lower during the first two weeks of the month with rising bond yields, slowing economic growth, elevated inflation, and Ukraine spurring uncertainty. With the lows of February retested and held, the market was able to retrace higher to end the month positively. The S&P 500 Index led the major market components, gaining 3.58%. The Dow Jones Industrial Average added 2.32%, and the Nasdaq Composite rose 3.41%. (1)

Yield Curve & Interest Rates

After the market declines seen in January and February, last month provided a lift off of the recent lows as investors digested the risks at hand. Attention turned to the bond market as the month progressed when the interest rate of the short-term 2-year Treasury note exceeded the interest rates of the 10-year note. Other parts of the Treasury yield curve also inverted, with shorter-term bonds yielding higher interest rates than longer duration bonds. (2,3)

Historically, these types of yield curve inversions have been an early signal that the economy is likely headed towards a recession. While yield curve inversions are not flawless predictors of future economic activity, the inversions have raised concerns and will likely remain top of mind in the months ahead.

The yield curve inversion is in large part due to the Federal Reserve raising interest rates last month - the first increase since December 2018. The Fed has openly stated they intend to continue to raise interest rates through the year as an aggressive policy shift to tame inflationary pressures. As the cost of borrowing money increases, the demand for goods and services will likely fall. While these actions are being taken to quell inflationary pressures, they will also likely cause the rate of economic growth to slow, as indicated with the inversion of the Treasury yield curve.

Interest Rates & Inflation

Amid the tensions in Europe, the markets have also been grappling with inflation which hit a 40-year high in January with consumer prices rising 7.5% year-over-year. To combat these inflationary pressures, the Federal Reserve reaffirmed its plans to raise interest rates beginning in March to slow demand for goods and services. While this may slow down the rate of inflation, it could also hinder the rate of economic growth. (2)