The screenwriter mentions the “second act problem.” After the first act establishes the characters and the stakes of the story, things can get a little confusing and confusing as the central conflict escalates before heading towards 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 has been to accept the prospect that Japan is considering the All this. Many of these remain true or plausible. But last week’s better-than-expected Consumer Price Index (CPI) for the third consecutive year reawakened bond market volatility and further fueled a resurgence in reflationary asset trading, driving growth, inflation, valuations, and the Fed’s Concerns about the need for imperfect trade-offs between policies have resurfaced. . 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. However, Bespoke says it bounced back from that line to finish above it 110 times in a row, making it one of the longest of a dozen such streaks in the past 80 years. Consider this test of Larry’s resilience to be ongoing, not settled. As I have said repeatedly, this primarily means that given the non-Fed-driven market and other solid macros, there was no need for an immediate or deep rate cut. It is. This does not mean that the market can easily ignore the situation where the Fed completely withdraws its easing bias this year. That’s because a slight lull in inflation, even in a still strong economy, is enough for the Fed to interrupt the tightening cycle with one or two “normalizing” rate cuts. So, without a rate cut, it 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, Chairman Powell had always said that the economy needed to remain “below its 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. This is why Wall Street was able to quickly treat good economic news as good news for stocks after a significant drop in inflation through November (much lower than the Fed expected). is. 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 markets represent part of this dissonance. His VIX, the ICE BofA MOVE index, the U.S. Treasury market so to speak, bottomed out to a two-year low on March 28, the day the S&P 500 last hit an all-time high, and has since risen. Continuing. The yield on the 10-year note hit 4.5%, easing slightly on Friday’s geopolitical bidding. .MOVE 5Y Mountain ICE BofAML MOVE Index, 5 Year A torrent of hedging activity has also swept into 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, the SPDR Gold Share (GLD) ETF saw huge volume and soared 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 a re-establishment of the wall of fear, but the In the middle is not such a confident situation. forecast. In these fluid times, when it’s difficult to bridge a story from its setting to a satisfying conclusion, it’s often helpful to build up what we know, or are reasonably 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 look back to the S&P 500’s last low in October 2022, or to October of last year when the market bottomed, 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 (two consecutive quarters of 10% gains, no 2% decline in five months) is based on numerous studies of past market movements. , which also strongly suggests that the ultimate peak has not been reached. Still, as I wrote here two weeks ago when citing some of these statistics, “In the past 11 times, the S&P has entered the second quarter up at least 10%; The smallest pullback in 2017 was 4%.And that was in the 1960s.”The smallest pullback in recent decades for 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 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 “optional” 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’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 “excessive 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 are posed… Consistently positive surprises followed by confirmation that the market’s implicit growth expectations are justified moving forward through the reporting period.” Tactically, Short-term momentum has broken and an attitudinal reset 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.
