By Pete Biebel, Senior Vice President, Senior Investment Strategist
Print This Post
For the last two months of 2023 and the first few months of this year, the expectation of looser financial conditions powered the stock market higher. The belief that as many as a half-dozen rate cuts by the U.S. Federal Reserve (Fed) lie ahead in the New Year warmed the cockles of traders’ hearts, and whetted their appetites for equity exposure. A looser Fed would imply lower interest rates and potentially higher earnings. Investors were gaga over the prospects for looser financial conditions. The S&P 500 Index (SPX) surged 27% from its October low to the end of March.
But now, we’ve got some ‘splainin’ to do. In recent weeks, surging prices for commodities (like crude oil, gold and even cocoa) and a surprising increase in the yield on 10-year Treasury notes have greatly reduced the likelihood of the Fed loosening anytime soon. Where the odds of a Fed rate cut at its May meeting were pretty good, and a cut in June was a near certainty, those prospects have dimmed considerably. The recently higher commodity prices and interest rates were exacerbated by a larger-than-expected increase in the Consumer Price Index last week. A May rate cut now seems very unlikely, and even a rate cut in June is now less than a 20% probability. The likely number of Fed rate cuts during 2024, which was in the five or six range a few months ago, has tumbled to one or two.
The declining prospects for Fed easing brought declining stock prices. The beginning of April brought back-to-back weekly losses in all the major indices. SPX lost 1.56% for the week; its closing level on Friday was its lowest in more than a month. The Dow Jones Industrial Average (DJIA) fell 2.37% last week to its lowest closing print since late-January. The year-to-date gain for DJIA is now less than 1%. The NASDAQ Composite Index (COMP) set a new closing record high on Thursday (though it did not reach a new intraday high) before its loss on Friday dropped the index to a net loss for the week of 0.45%.
Another casualty of less likely loosening was small-cap stocks. The Russell 2000 Index (RUT) enjoyed occasional bursts of strength in early 2024, even inspiring many analysts to rejoice over the widening market participation. By early March, RUT was up more than 3% year-to-date. But the index was unable to develop much upward momentum. Higher interest rates and higher energy prices have weighed on small caps in recent weeks. Last week, RUT fell nearly 3%; it’s down nearly 4% over the last five weeks, and it’s now down about 1% for the year.
The yield on 10-year Treasury notes began the year around 4%; it bumped up and see-sawed around 4.25% through February and March. That yield rose above 4.3% on April 1 (no foolin’) and shot up to near 4.6% last Thursday before settling back to end the week at 4.53%. That yield is hovering near its highest levels in five months. What’s most concerning about the sudden increase in the 10-year yield is that it could continue to climb even if the Fed reduces its short-term target rate later this year. The stock market has risen to a very rich valuation largely in anticipation of lower interest rates. The market has bought into the fallacy that a lower federal funds rate will cause longer-term rates to also decrease. But that ain’t necessarily so. If the impacts of solid economic growth and low but persistent inflation are compounded by runaway fiscal indebtedness, then long-term rates could be pressured higher, even with a Fed rate cut later this year. Investors will now be paying more attention to the results of upcoming Treasury note and bond auctions. Last week, one such auction ($39 billion of 10-year notes) went very poorly and contributed to the spike in yields.
All 11 S&P industry sectors had losses last week, but there were a couple surprises. First, the technology sector was the best of the lot with just a 0.5% loss for the week. The surprise there was that the recently fading Magnificent Seven stocks were the key contributors to the market’s snap-back rebound on Thursday. Perhaps it’s too soon to write off that group. The second shocker was that the interest rate-sensitive utilities sector fell only 1.47% on the week. That was the fourth smallest among the industry sectors. Given the steep increase in the 10-year rate, that sector could have blown a fuse. The saving grace for the group is that the fervor over artificial intelligence is now bullish for utilities. Traders have bid up the prices of several utility companies that are expected to see a significant surge in power demand from data warehouses in their regions.
The market had been extended and was overdue for some consolidation. Given how last week ended, we should expect more weakness in stocks. On Friday, the volume of declining issues exceeded that of advancing issues by a 13-to-1 ratio. SPX ended last week near 5123. At its low on Friday, SPX bounced off its 50-day moving average. Sustained trading below that average, which begins the week at week at 5111 (and has been climbing about five points a day), would likely lead to a more substantial decline. In that circumstance, my next downside target would be in the 4975-5025 range. If SPX can get through a few days without additional losses, then the index would need to climb back above 5200 to give the all-clear.
This will be the first busy week of the new earnings season. Last week saw reports from several dozen S&P 500 companies, mostly financial institutions. So far, reaction to the reports has had a negative bias. This week will bring many more announcements to provide a better basis for assessing the market’s response. Analysts expect overall earnings this quarter to increase by 0.8% to 1.0%, with the largest gains coming from tech companies. Many companies in more cyclical sectors are expected to report lower earnings.
This week also brings a big increase in geopolitical tension. The weekend drone and missile attack on Israel by Iran greatly increased the potential for an expansion of hostilities in the Middle East. As of this writing on Sunday evening, stock index futures are actually trading a bit higher; so, so far, the market isn’t too worried.
| Economic Calendar (4/15/24 – 4/19/24) | Previous | Consensus | |
| Monday 4/15/2024 | Empire State Manufacturing Survey, April | -20.9 | -10.0 |
| U.S. Retail Sales, March, M/M | +0.6% | +0.5% | |
| Retail Sales ex-Autos, March, M/M | +0.3% | +0.5% | |
| Business Inventories, February, M/M | 0.0% | +0.4% | |
| Home Builder Confidence Index, April | 51 | 51 | |
| Tuesday 4/16/2024 | Housing Starts, March, SAAR | 1.52mm | 1.47mm |
| Building Permits, March, SAAR | 1.52mm | 1.50mm | |
| Industrial Production, March, M/M | +0.1% | +0.4% | |
| Wednesday 4/17/2024 | Fed Beige Book | ||
| Thursday 4/18/2024 | Initial Jobless Claims | 211K | 210K |
| Continuing Claims | 1,817K | 1,818K | |
| Philadelphia Fed Manufacturing Survey, April | 3.2 | 0.0 | |
| Existing Home Sales, March, SAAR | 4.38mm | 4.11mm | |
| U.S. Leading Economic Indicators, March, M/M | +0.1% | 0.0% | |
| Friday 4/19/2024 | No Reports Scheduled | ||
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market