The screenwriter mentions the “second act problem.” After the first act establishes the characters and the stakes of the story, things can get a bit muddled and confusing as the central conflict escalates before coming to a final resolution. Although the first quarter unfolded in an orderly manner and there were no complications in the rally, the market entered this chaotic mid-stage. The first act of 2024 will feature strong economic growth, a strong and rebalancing labor market, subdued inflation, rising earnings growth, repeated record high stock prices, and the Federal Reserve cutting interest rates. The consensus was to accept the prospect that Japan is considering the All this. Many of these remain true or plausible. But last week’s consumer price index (CPI) beat expectations for the third year in a row, reigniting bond market volatility and further accelerating the resurgence of reflationary asset trading, leading to changes in growth, inflation, valuations, and Fed policy. Concerns have resurfaced that imperfect trade-offs may be needed between . As a result, the S&P 500 index fell 1.5% for the week, with Friday’s decline exacerbated at least in part by a collective tightening of risk markets due to geopolitical concerns. Test Rally The index fell one week after the S&P ended its first 2% decline in more than five months, an early sign of a potential change in market characteristics. has approached its 50-day moving average. But Bespoke says it bounced back from that line and topped it 110 times in a row, one of the longest such streaks of more than a dozen in the past 80 years. Consider this test of Larry’s resilience to be ongoing, not settled. I’ve said this repeatedly in the past, but this primarily means that given the non-Fed-driven market and other solid macros, there was no need to cut rates right away or by much. It is. This does not mean the market can easily ignore the situation where the Fed completely withdraws its easing bias this year. That’s because even in a still-strong economy, a slight lull in inflation is enough for the Fed to interrupt the tightening cycle with one or two “normalizing” rate cuts. So, without a rate cut, that means inflation will become more stubborn, and perhaps long-term yields threaten to continue weighing on equity advances. Chairman Jerome Powell’s shift toward an easing bias late last year was enthusiastically received by markets, meaning the Fed no longer sees the need to rein in growth to control inflation. I want you to remember that. Until then, Powell had always said that the economy needed to be “below potential for a sustained period” to contain inflation. He frequently pointed out that inflation in the service sector is actually tied to higher wages, so the job market may need to soften significantly to push prices down. That’s why the substantial decline in inflation through November (much lower than the Fed expected) has allowed Wall Street to immediately treat good economic news as good news for stocks. While this dynamic has not reversed, the signals have become somewhat static, with the S&P 500 still 24% above its October low, taking some measure out of the macro bullish case. Confidence is lost. The soaring yields and gold bond market are part of this dissonance. His VIX, the ICE BofA MOVE index, the government bond market so to speak, bottomed at a two-year low on March 28, the day the S&P 500 last hit an all-time high, and has continued to rise ever since. I am. The 10-year Treasury yield rose to 4.5%, but eased slightly on Friday’s geopolitical auction. .MOVE 5Y Mountain ICE BofAML MOVE Index, 5 Years A torrent of hedging activity has also flooded the stock options market and his VIX futures market, a sign that traders are willing to pay up to protect their profits. The price of gold has risen almost vertically this month, and on Friday, just as the gold price hit a short-term buying crescendo, volume in the SPDR Gold Share (GLD) ETF surged from $2,400 to $2,440 an ounce. , and then rebounded to $2,360. @GC.1 1Y Mountain Gold, 1 Year This tingly cross-asset movement may at some point reflect a beneficial upwelling of trader anxiety and the re-establishment of a wall of fear, but it is also possible that the squall Being in the middle of the day is not an opportunity to show such confidence. forecast. In these fluid times, when it’s difficult to bridge a story from its setting to a satisfying conclusion, it’s helpful to build up what we know, or are fairly certain about, about the current context into a synopsis. Going back helps. Bull Market Background First, this is a bull market, and it is not yet a particularly mature or overly forgiving market. Some are looking to go back to the S&P 500’s last low in October 2022, or to October last year when the market bottomed out, but trends tend to be higher, with overshoots to the top, and pullbacks. will eventually be suppressed and made available for purchase. The persistence and breadth of the rare bull market from October to March 2023 (2 consecutive quarters of 10% gains, no 2% decline in 5 months) is based on numerous studies of past market movements. Similarly, it strongly suggests that the ultimate peak has not been reached. Still, as I wrote here two weeks ago when I cited some of these statistics, “In the past 11 times, the S&P has entered the second quarter up at least 10%, but the rest The smallest pullback in the year was 4%. And that was in the 1960s.” The smallest pullback in recent decades in such a year was more than 6%. It is currently rebounding by 2.7%. It’s safe to assume that at some point, the market is going to grab a set of credible excuses to undergo at least a decent small-scale cull. This is not to say that the persistence of CPI inflation is just an empty excuse, but some perspectives on the inflation situation are worth mentioning. According to future reports, shelter inflation should still lag. And more importantly, the Fed’s 2% inflation target is based on the PCE measure, which is consumption-weighted and lower than the CPI. Economists expect core PCE to grow at an annualized rate of around 2.8% (the report is expected to be released within two weeks). The latest median forecast for core PCE among Fed members at year-end was 2.6%, and the median forecast for the number of rate cuts this year was three. This is not a very long distance to travel to set the stage for one of these “voluntary” rate cuts to take place. A reconsideration of the Fed’s policy will not preclude the currently expected recovery in corporate earnings and is likely necessary to validate current full valuations. FactSet’s John Butters predicts that his S&P 500 index’s earnings growth in the first quarter will be higher than a year earlier, based strictly on the average percentage upside over expectations seen over the past four reporting periods. We predict that it will exceed 7%. The market reaction will be noisy and will expose the “over-belief” among investors in certain favorite themes. Last Thursday, when Fastenal fell short of expectations, the large industrial investment stock’s stock fell 6.5%, pushing WW Granger’s share price down 3.5%. However, both stocks have still outperformed the S&P this year. As Citi U.S. equity strategist Scott Kronert said on Friday, “Markets are pricing in a more likely Goldilocks scenario to play out this year, with ‘good but not good enough’ news leading to more downside exposure.” Risks posed… Consistent positive surprises, followed by confirmation that the market’s implicit growth expectations are justified, could lead to progress through the reporting period.” Tactically, short-term The current momentum has collapsed, and a reset of attitudes is underway. The S&P 500 index closed Friday exactly at the same level it did on March 8, five weeks ago. This was perhaps the moment when investors’ confidence in the “we can have it all” theory was at its peak. Powell had said a day earlier that it would be “not long” before the Fed could cut interest rates, but on Wednesday, near-perfect jobs numbers strengthened the consensus for a soft landing. The market is, in a sense, doubling down to test these assumptions.
