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A year after the U.S. stock market cratered in the Covid-19 crash, the S&P 500 ended the month of March at a fresh record high. All in all, the U.S. benchmark index has gained more than 77% in the year since the March 2020 bottom.

Nevertheless, March wasn’t exactly a smooth ride. Concerns about the potential for higher inflation, rising bond yields and the collapse of the investment fund Archegos Capital drove a fair amount of volatility in stock prices. Aside from these worries, the year already is off to a solid start: Both the Dow Jones Industrial Average and the S&P 500 posted a fourth straight quarter of gains, with the two indexes rising 7.8% and 5.8% in the first quarter of 2020, respectively.

Looking ahead to April, investors want tangible proof the economic recovery is firmly taking root. Earnings season—the multi-week period when public companies report their quarterly results—gets started mid-month, and market participants want to see momentum carry over from the fourth quarter of 2020, notes Tim Courtney, chief investment officer of Exencial Wealth Advisors.

“The market has gone about as far as it can on hope; it’s kind of kicking around and we’re waiting for the data to come in,” he says. “The good news is that everything is progressing in a very similar way to the way the market had envisioned.”

April historically has been the second-strongest month for performance on average. Besides earnings season, this April could see market-moving news come from the Covid-19 vaccine rollout and continued reopening of the economy, the Federal Reserve or more worries about inflation.

On the Road Back to Normal?

About one-third of the U.S. adult population has received at least one dose of a Covid-19 vaccine as of late March. While the usual deluge of monthly economic reports offer plenty of measures of economic progress, investors are peering ahead at an emerging sense of normalcy, notes Lamar Villere, partner and portfolio manager with Villere & Co.

“Investors seem to be shrugging off most economic indicators with an eye on: ‘Hey, we’re a month or so away from being completely back to normal,’” says Villere, who also cautions that this optimism assumes no big uptick in Covid-19 cases. “The market seems to be telling you that what’s happening today doesn’t matter so much if tomorrow is going to be fine.”

The ramp-up in vaccines and the new federal stimulus package should give American consumers more confidence to get out and spend more money, Courtney says. In turn, shares of restaurants, travel and leisure companies, and hotels, among other companies, could benefit, he adds. “We’re starting to see some type of return for those beaten-down sectors.”

Finally, there could be more money flooding into the economy ahead. President Joe Biden on March 31 unveiled details of a $2 trillion-plus infrastructure and economic recovery package, styled the American Jobs Plan. The political haggling over the exact details of the proposal will be closely watched in the month ahead.

All the spending should become a big focus for market participants, Courtney says. “I don’t think the market is really focusing too much on the debt and tax increases that are likely to come as a result of that spending,” he adds.

Banking on a Solid Earnings Season

Earnings season kicks off mid-month, and publicly traded companies will be reporting results for the first quarter. Along with the weekly jobless claims reports and the monthly jobs report, scheduled for release on April 2, this information will be “pretty important” for market participants, notes Brooke May, CFP, managing partner at Evans May Wealth.

“Earnings expectations are very high for this year, and we’re going to need to see companies deliver on the earnings projections,” May says. While some companies have received a lot of attention in recent months, if they don’t have sustainable business models or strong earnings growth, their stock prices could experience a selloff ahead, she adds.

What’s more, there’s a risk that corporate earnings are lackluster and don’t offer the confirmation of the economic recovery that many investors have been betting on, Courtney notes. “This is the month where we want to see the proof, that’s it in a nutshell.”

For the first quarter, Wall Street analysts are currently projecting that members of the S&P 500 will report the highest year-year earnings growth since the third quarter of 2018, according to FactSet.

If companies do indeed see an acceleration in earnings, when compared with the fourth quarter, that could be a reason for the market to move higher in the short term, Courtney says. And if so, stocks that have done well in recent months—value, small-cap and economically sensitive sectors—are most likely to outperform the broader market, he adds.

Inflation and the Fed

A hot-button issue in the market lately? Inflation. Consumer prices have been creeping higher in recent months, though inflation is hardly skyrocketing. Federal Reserve Chair Jerome Powell has shrugged off concerns in the market about the risk of higher inflation that’s long-lasting.

“Inflation has become a headline that has gotten a lot of attention, and we don’t fear runaway inflation,” May says. Even if interest rates continue to increase modestly, she says this doesn’t necessarily indicate higher inflation is coming.

Powell has repeatedly said that the central bank won’t raise the benchmark federal funds rate until there’s significant evidence that the U.S. economy is on solid footing, with maximum employment and inflation above even its 2% goal in the short term. Because of this, traders predict very low odds of a rate hike at the Fed’s upcoming meeting on April 27 and 28.

That meeting, however, will be closely watched for any hint of future rate hikes. “The whole market is spinning around the Fed,” Villere says, adding that policymakers have “gotten the memo” about what investors are expecting ahead. “As long as they move very slowly and carefully, the market is going to do fine.”

The Great Rotation

Finally, a market rotation that’s been underway for months could continue in April—and beyond. In March, value stocks were outperforming growth stocks year-to-date by the widest margin since 2001. Even Villere and his colleagues, though generally growth investors, are “rotating pretty steadily into value” because these stocks have more attractive valuations and a lot of catching up still to do, he says.

However, May takes a more nuanced, and company-specific approach to the market’s apparent rotation. She says that some growth stocks could continue to do well while a selloff for some value stocks could be warranted.

“There’s a change in leadership going on right now in stocks, with investors moving away from companies that were high flyers over the last year and looking more at companies that have sustainable business models,” says May.

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