The ideal solution for a market that’s gone too far, too fast is to let it slow down and pick up a bit. For the most part, that’s been the story on Wall Street over the past six weeks. The five-month 28% sprint from the October correction lows to the all-time high on the last trading day of the first quarter has left the S&P 500 in a state of overbought, overheated and overloved. Meanwhile, as U.S. Treasury yields moved higher on another sticky inflation scare, stocks retreated until the stock market’s typical 5%-6% pullback eased these technical extremes. The current market and macro storylines are changing faster than the underlying facts, and the rebound in the index over the past three weeks has been helped by cooling inflation measures, evidence of easing labor conditions, and a message of goodwill and patience from Fed Chairman Jerome Powell and a series of earnings reports. The report broadly verified the full-year profit growth prospects. The possibility of such a pendulum swing was seen emerging three weeks ago, with some suggesting that the PCE inflation data may reflect that “markets have shifted in a less hawkish direction and the narrative may once again shift to a less hawkish direction.” direction”. The assumption of unrelenting consumers and the assumption of higher interest rates in the long term. ” .SPX YTD The mountain-shaped S&P 500, which has performed well year-to-date, has had three weeks of declines and now three weeks of gains, bringing the S&P 500 back to within 1% of its March 28 peak. The pace of the rebound is for the bulls is encouraging and at least confirms a long-term uptrend: market breadth is quite strong, global indexes are moving higher in tandem with the U.S., and some technical hurdles have been cleared (the S&P 50 last week, when the index broke above its daily moving average, the daily moving average did not show any resistance). But the manner and composition of the S&P’s break above 5,200 is different in important ways from the last time, and the immediate direction thereafter depends on next week’s inflation data and its correlation with signs of consumer fatigue. Interplay. Can bad news turn out to be good news for the market? Bank stocks have outperformed the benchmark by a full percentage point since the market peaked on March 28, while technology stocks have lagged the benchmark index by a similar margin. But the picture is more dire for equal-weighted consumer discretionary, down 6% for the quarter, with decelerating demand and value sensitivity being common themes in earnings commentary. It’s not a loud alarm for the broader economy by any means, but the market is. Much will be driven by rate-of-change dynamics. Citi’s U.S. Economic Surprise Index fell significantly below zero for the first time in 15 months (meaning the data was on average below economists’ forecasts), which so far has not been a surprise to the market. The damage is widespread, in large part because a cooling of consumer activity, at least in visible areas, helps address the top priority of curbing inflation. I generally reject the “bad news is good news” argument that Wall Street often supports. Conditions for the Fed to ease policy. It only works in a few situations: when policy is already considered a bit too tight, and when any convenient blips in the economy are unlikely to spill over into a real recession. Over the long term, markets track economic trends. However, “bad news is almost good news all over again,” said Scott Cronut, Citi U.S. equity strategist. More specifically, he tracks the correlation between the S&P 500 and Citi’s Economic Surprise Index. “Of late, this positive correlation has weakened significantly. This suggests that hot macro data increasingly threatens the soft landing narrative that may be necessary to drive markets higher from these high valuation levels.” Profit outlook maintained Strong Another reason stocks are holding up amid weaker macro trends is that corporate earnings overall were once again “better than expected, as expected.” In addition to three-quarters of companies beating consensus forecasts and overall first-quarter growth exceeding 5%, forward guidance was enough to keep full-year forecasts stable. Jurrien Timmer, global head of macro at Fidelity Investments, analyzed the S&P 500’s profit trajectory in each calendar year, with 2024 outperforming last year’s 2023. The last time the S&P 500 reached today’s levels above 5,200 in late March, the 12-month forward price-to-earnings multiple was 21. The multiple has now been reduced to 20.4 and plugged into the denominator. At the end of March, the 10-year Treasury note rate was mostly below 4.3%, and after a rapid rise to 4.7%, it is currently at 4.5%. More preliminary evidence suggests that stocks can absorb higher yields within reason, as long as the economy can cope with these issues and Treasuries don’t explode into wild swings. This has made for a fairly benign set of market interactions, and of course the CPI (and PPI) inflation data released in the coming week – and the bond market’s reaction to it – will have plenty of indications as to whether things remain normal. Is a 5% retracement enough? The bar for Fed Chairman Jerome Powell to consider tightening policy is clearly much higher than one or two rate cuts later this year. Despite all the criticism and sentiment surrounding what the Fed might do and when, the fact is that the federal funds rate has remained unchanged at cycle highs for ten months and the economy is expanding well, Inflation has been falling at least intermittently, saying policy is in a pretty good place. Of course, there are always nagging reasons to doubt the credibility of the rally. Election-year seasonality suggests stocks could be soft heading into Memorial Day before easing over the summer. While the stock market has rebounded sharply in recent weeks, the picture for the leaders has been a bit inconsistent when looking at the advance/decline numbers – with a mix of mean-reversion strong rebounds in financials, defensive groups, some industrials and utilities, Too much. There’s also the memory of last summer, when stocks rallied to their late-July highs, sending “overdone” signals just like the market did in late March. Then, just like now, what follows is a very orderly three-week 5% retracement and then a bounce back above the 50-day moving average, just like now. U.S. Treasury yields then rose sharply again, raising concerns about economic affordability, and a fuller 10% rise was not completed until late October. The global economy and the Fed’s stance, not to mention inflation levels, are in a better position today, so no one is saying that recent history will repeat itself. Credit markets and volatility also mean there is currently a lack of stress in capital markets. Some believe April’s reset in investor attitudes and positioning looks incomplete. Lori Calvasina, head of global equity strategy at RBC Capital, wrote last week: “Over the past few weeks, we have argued that our sentiment indicators have not declined enough to suggest that the current pullback is over. , which remains our view today. If nothing else, this may indicate that the 5% market decline did not pull the slingshot back far enough to propel prices higher above the old highs, of course. It’s a bull market, and in a bull market, pullbacks tend to happen naturally, and then get chaotic and scare the crowd, giving bargain-hunting investors a chance to feast.
