Financial Markets Review

In April, U.S. equities experienced a downturn following the robust gains seen in the first quarter. Major indices retreated from their highs, with the S&P 500 dropping 4.1%, followed by the Nasdaq and Russell 2000 falling 4.4% and 7.1%, respectively. Concurrently, Treasuries exhibited weakness, as the 2-year yield surged 33 basis points, surpassing 5% for the first time since November 2023, and the 10-year yield climbed 50 basis points to crack the 4.7% level. Much of the weakness in equities and fixed income took place in the first half of the month, while markets began to recover in the back half of the month.

The slide in the stock market and surge in Treasury yields was preempted by the market’s recalibration of expectations regarding Federal Reserve rate cuts. Initially, there was high confidence in three rate cuts for 2024, commencing in June. However, sentiment shifted towards the notion of a more modest 25-basis-point cut later in the year as economic data in the beginning of the month showed continued economic strength and persistently high inflation. March nonfarm payrolls exceeded expectations, as did retail sales. In addition, March’s Consumer Price Index (CPI) outpaced consensus forecasts, particularly in sectors like shelter and services.

As April progressed, equity markets began to recover some of their losses as the ascent in Treasury yields tapered off. The “bad news is good news” theme came back into play with economic data points coming in a bit weaker than expected. April flash PMIs missed expectations, noting for the first time in six months, a reduction in orders and for the first time in four years companies scaling back employment. The first read on Q1 GDP also came in well below expectations showing the U.S. economy expanded by 1.6% versus a forecasted 2.5%, which also represented quite the slowdown from Q4’s growth of 3.4%.

So far in the first couple weeks of May, the economic reports that have been released continue to point toward a softening in the economy. The April nonfarm payrolls report continued to show growth in the labor market; however, the report missed expectations and slowed from prior months. The April ISM Services index fell below 50 and into contraction for the first time since December 2022. And lastly, there has been a good bit of chatter regarding concerns around a weakening consumer. The University of Michigan’s preliminary May consumer sentiment report was well below consensus, showing a considerable decline in the consumer’s assessment of current conditions and expectations for the future.

With an increasing number of reports pointing to economic growth slowing, Treasury yields have fallen quite a bit since the start of May. Both 2-year Treasury notes and 10-year Treasury bonds have declined roughly 20 basis points. The drop in yields, coupled with a sense that the Fed will be there to cut interest rates to combat weakening growth, has again pushed equity markets to near record highs. The risk with this line of thinking is that inflation remains stubbornly above the Fed’s 2% target, and thus the much-anticipated easing cycle gets delayed. As several inflation reports come out over the next week, we should get a better sense of the direction of interest rates, which will dictate the next move in the equity market.

Tandem Strategy Update*

Since the beginning of the year, interest rates have been moving higher, but they have been doing so at a steady pace. And, for the most part, equities have been able to handle the grind higher in rates. As Treasury yields soared in the first half of April, just about anything associated with being an income producing security fell indiscriminately. We have seen this story before, and it was during the first few months of 2022 when the Fed began hiking interest rates to fight inflation. From January 2022 to April 2022, the 2-year Treasury yield went from 0.70% to 2.70% and the 10-year Treasury went from 1.50% to 3.00%. It wasn’t so much that yields were going higher, but more so the speed at which they were increasing. The indiscriminate selling in equities gave us an opportunity to put cash to work in 2022 and we were able to do so again during the most recent brief bout of equity volatility.

Across all three strategies, we had the opportunity to add to our existing positions in STERIS (STE) and Jack Henry & Associates (JKHY). STERIS is a leading global provider of products and services that support patient care with an emphasis on infection prevention. Look around the next time you are in your doctor’s office, and you will see something with STERIS on it. The company has consistently grown revenues, earnings, and cash flow at a 13% five-year compounded annual growth rate. As a result of this growth, STE has been able to consistently grow their dividend for the past 18 years.

Jack Henry & Associates provides financial technology solutions and payment processing services to banks and credit unions. As the world continues to evolve in the digital age, the services and products that JKHY offer are vital to financial institutions and their customers. From creating digital banking platforms to protecting a company’s information security systems, JKHY has proven the ability to consistently grow revenues, earnings, and cash flow. Just last quarter, JKHY announced a 6% increase to their quarterly dividend, which marked the 20th consecutive year of growth.

In addition to the incremental purchases of STE and JKHY, we also had the opportunity to add to Terreno Realty (TRNO) within our Mid Cap Core strategy and to Five Below (FIVE) within our Equity strategy. Given the recent uptick in interest rate volatility, the likelihood of this volatility permeating into equities is high. The increase in volatility ultimately is a beacon to be opportunistic within the strategies we manage.

*The transition level activity taken by Tandem is applicable to new accounts and new money, not the composite or firm-wide level. New accounts and new money are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

Source: Source of all data is FactSet, unless otherwise noted.

Disclaimer: Tandem Investment Advisors, Inc. is an SEC registered investment advisor.

This audio/writing is for informational purposes only and shall not constitute or be considered financial, tax or investment advice, or an offer to sell, or a solicitation of an offer to buy any product, service, or security. Tandem Investment Advisors, Inc. does not represent that the securities, products, or services discussed in this writing are suitable for any particular investor. Indices are unmanaged and not available for direct investment. Please consult your financial advisor before making any investment decisions. Past performance is no guarantee of future results. All past portfolio purchases and sales are available upon request.

All performance figures, data points, charts and graphs contained in this report are derived from publicly available sources believed to be reliable. Tandem makes no representation as to the accuracy of these numbers, nor should they be construed as any representation of past or future performance.​