The ideal solution to a market that has gone too far, too fast is to slow down and back off a bit. By most views, this is the story of the past six weeks on Wall Street. A 28% five-month rally from October’s correction low to its all-time high on the last trading day of the first quarter has left the S&P 500 overbought, overheated, and overloved. That signaled a rally in U.S. Treasury yields on persistent inflation concerns, and stocks retreated until the typical 5% to 6% drop in stocks eased the technical extremes. The general market and macro storylines change faster than the fundamental facts, and over the past three weeks, the index has seen cooler inflation readings, evidence of tightening labor conditions, and more from Federal Reserve Chairman Jerome. Messages of generous patience rose together. There has been a flurry of earnings reports broadly supporting Chairman Powell and his outlook for full-year profit growth. Three weeks ago, it appeared here that the true nature of such a pendulum swing could potentially surface, with the PCE inflation measure showing “a new trend in a less hawkish direction now that the market has shifted.” There were also suggestions that it may reflect a changing outlook in the narrative. The assumption of a persistent consumer and the assumption that higher interest rates will continue for a long time. ”.SPX YTD Mountain S&P 500, year-to-date index very good so far, down 3 weeks, now he’s up 3 weeks, S&P 500 at his March 28th high It has returned to within 1% of The rally-rebound rhythm is encouraging for bulls as it at least confirms a long-term uptrend. Market breadth is very strong, global indexes are rising in sync with the US, and some technical hurdles have been cleared (S&P 50 Index). -The daily average did not resist last week as the index rose above it). However, the trajectory and composition of the S&P’s rise above 5,200 this time is different from the previous one in important ways, and the immediate path forward from here will depend on the interplay between next week’s inflation data and signs of consumer fatigue. There is. Can bad news be good news for the market? Bank stocks have outperformed the benchmark by 1 percentage point since the market peak on March 28, while the tech sector has lagged by a similar margin. However, the picture was even tougher for the equal-weighted consumer discretionary sector, which fell 6% in the quarter as slowing demand and value sensitivity were common themes in earnings commentary. This is not yet a loud wake-up call for the economy in general, but markets are mostly swayed by rate-of-change trends. The Citi U.S. Economic Surprise Index has fallen significantly below zero for the first time in 15 months (meaning the data is on average below economist expectations). So far, this has not had a negative impact on the overall market. The main reason is that the cooling in consumer activity (at least where it is evident) is contributing to the top priority of lowering inflation. I generally reject the “bad news is good news” concept, which assumes that Wall Street supports conditions for the Fed to ease policy. It only works under limited circumstances. That is, when policy is already seen as slightly too tight, and when convenient wobbles in the economy are unlikely to spill over into a full-blown recession. In the long run, the market tracks your economic fortunes. But Citi U.S. equity strategist Scott Kronert suggests that “bad news is once again approaching good news.” More specifically, we track the correlation between the S&P 500 and the Citi Economic Surprise Index. “Recently, that positive correlation has noticeably faded, as hot macro data increasingly threatens the soft-landing narrative needed to lift the market off these inflated valuation levels. ” Earnings outlook is solid Another reason why the tape is solid against further loosening in the macro economy is that corporate profits as a whole have again exceeded expectations and been in line with expectations. Thing. Three-quarters of companies beat consensus estimates, and with the exception of first-quarter growth exceeding 5%, forward guidance remains at a sufficient level to stabilize full-year expectations. . Julian Timmer, Head of Global Macro at Fidelity Investments, makes this outlook for the S&P 500’s earnings path for and through each calendar year, and currently sees 2024 as a better year than last year’s 2023. The situation is said to be progressing. The last time the S&P 500 was above 5200 at today’s levels was in late March, and the 12-month forward price-to-earnings ratio was 21 times. It is now down to 20.4x as earnings reporting has improved and earnings estimates have moved further away over time. into the denominator. The 10-year Treasury bond was trading below 4.3% in late March, quickly rising to 4.7% and now sitting at 4.5%. More tentative evidence that stocks can absorb some higher yields within reason, as long as the economy copes with it and severe Treasury volatility doesn’t erupt. Market interaction will be very muted, but of course the coming week’s CPI (and PPI) inflation announcements, and the bond market’s reaction to them, will depend on whether things stay on track. There will be a lot to talk about. Was the 5% pullback enough? Fed Chairman Jerome Powell clearly has a much higher bar for considering even tougher policy than just one or two rate cuts this year. And despite all the criticism and mood swings about what the Fed does and when, the federal funds rate remains at an unusually long 10 The fact that it has held steady at monthly cycle highs says that policy is in a pretty good place. Indeed, there are always troubling reasons to question Larry’s credibility. Election year seasonality means stocks could fall heading into Memorial Day before the summer easing begins. While the stock price rally in recent weeks has been broad-based in terms of total historical gains/declines, the leadership profile has been a bit inconsistent. Financials, defensive groups, some industries are mixed, and there are too many strong mean-reversion rebounds in utilities. is trying to force the rationalization of “AI’s power demand”. I also remember last summer, when the rally to the peak in late July registered an “overshoot” signal, similar to the market in late March. Then, just like now, he was followed by a very orderly decline of 5% in three weeks, followed by a rebound above his 50-day moving average, just like now. Then, the full 10% flush wasn’t completed until late October, as U.S. bond yields spiked again, raising concerns about whether the economy could withstand it. The global economy and the Fed’s stance, not to mention inflation levels, are all in a somewhat positive place right now, so it’s hard to say that recent history will repeat itself. Credit market and volatility settings suggest that there is no capital market stress at this time. Some argue that the reset of investor attitudes and positioning in April appears incomplete. “Over the past few weeks, we have maintained that our sentiment indicators have not fallen enough to indicate that the current pullback is over; remains unchanged even today,” he said. Individual investor research and index futures positioning. At the very least, this may suggest that a 5% market pullback did not set back enough to force prices to rise above their all-time highs. Of course, it’s a bull market, and in bull markets, pullbacks often end on their own before things get chaotic and scare the crowd, giving bargain-minded investors a satisfying chance.
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