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In the past month, the Dow went up by about 2.5% and the S&P 500 went up by about 1.5%, but the Nasdaq was basically flat at 0.04%. This is a big change from March, when the Nasdaq went up much more than the S&P 500. Smaller companies did even worse, as the Russell 2000 went down by about 2%. Even though the Nasdaq didn't move much overall, it had a strong last week of April thanks to good earnings from big tech companies.
In my previous newsletter, I explained how Silicon Valley Bank and two other banks shut down because of rising interest rates. This month, the bank that everyone was worried about was First Republic Bank. Its stock went down about 75% in April after it reported that customers pulled out more than $100 billion in deposits in the first quarter. On May 1st, regulators seized First Republic and sold it to JPMorgan Chase. This is the third bank to fail in two months, and the second largest bank failure in US history. Like Silicon Valley Bank, most of First Republic's deposits were above the $250,000 insurance limit, and it had a lot of loans made at low interest rates. When interest rates went up, those loans lost value. Jamie Dimon, the CEO of JPMorgan, said he thinks this part of the banking crisis is over.
There was also some good news on inflation. The CPI for March came in at 5%, down from 6% in February. This is the ninth month in a row that inflation has gone down. However, core inflation (which doesn't count food and energy) was still at 5.6%, which is too high for the Fed. The Fed is meeting this week, and it is expected that they will raise interest rates by another quarter point. The market is hoping that this will be the last increase for a while.
The biggest story of the month was earnings season. About 79% of S&P 500 companies that reported beat their earnings estimates. Microsoft and Alphabet (GOOGL) both had better than expected results. Microsoft's stock went up more than 8% the day after its report because of strong growth in its cloud business, Azure. GOOGL also beat estimates and announced a $70 billion stock buyback. These results show why I like to invest in high quality companies. Even when the economy is uncertain, well managed companies with strong and consistent profits keep making money.
My strategy of investing in high quality GARP (Growth At a Reasonable Price) stocks across different sectors also helped this month. In April, the best sectors were communication services, financials, health care, and consumer staples, while industrials went down a little. Having stocks in many different sectors means that when one sector is having a bad month, other sectors can make up for it. This is why diversification is so important.
The bank failures also teach an important lesson. Before you invest in a company, it is important to look at the quality of its business, not just its price. First Republic stock was around $115 in early March, and by the end of April it was around $3.50. A company with high and consistent profits and a strong balance sheet is much safer than a company that depends on things going right. This is the same reason why I like high dividend growers. Companies that can grow their dividends year after year are usually the ones with the strongest profits.
Thanks for reading my newsletter!