The Bad News (Brings Back) Bears

Apr 22, 2024

By Jack Kraft, CFA, Investment Strategist
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U.S. equities suffered another volatile week of trading as investors digested conflict in the Middle East and the prospect of rate cuts being delayed. The path of least resistance seems to be lower as the bears have gained momentum with the S&P 500 logging six consecutive down days in a row. The large-cap index finished the week down 3.1% and broke through both its 50-day moving average and the psychological 5,000-point level. Meanwhile, the tech-heavy Nasdaq Composite lost 5.5% as momentum-oriented stocks received selling pressure. The Dow outperformed its peers, ending the week flat.

Investment sentiment has been dampened mainly by inflation developments over the first three months of the year. Although we remain in a disinflationary environment, the path from 3% to 2% inflation has been much bumpier than previously anticipated. This, combined with better-than-expected U.S. economic growth, has driven a higher-for-longer narrative with the Federal Reserve (Fed). Coming into the year, market “experts” were confident that we would see up to six rate cuts, but the narrative has quickly changed as some members of the Fed have begun to get more and more hawkish. The Federal Reserve President of Minneapolis noted this past week that the central bank could hold rates at current levels until the end of the year. Personally, I think the Fed will need to see three-month annualized inflation trending at or near 2% before they can move rates lower. Currently, three-month annualized inflation is above 4% when using the core price index measure.

Elsewhere, geopolitics have been a large overhang as experts assess risks of a broadening conflict between Iran and Iseral. Overall, the energy market’s reaction has been mostly muted, indicating a premium had already been priced into oil prices prior to the attacks. In fact, oil had its worst week since February after Iran downplayed a retaliatory Israeli air strike.

As long as this conflict remains contained it should have a much less severe impact on oil prices than what we saw at the start of the Russia-Ukraine war. This is because Russia is the third-largest oil producing nation, accounting for 11% of global supply, while Iran is the ninth-largest producing nation with just 4% of supply. Additionally, developed nations (e.g., Europe) are far less reliant on Iranian oil than what they were on Russian oil. This should help avoid any supply shock that could cause a spike in energy prices and a tick up in inflationary pressures. In short, we should remember that most geopolitical events are short-lived by markets and have little impact on performance; I don’t think this conflict will be much different.

Eight of the 11 S&P 500 sectors ended the week in negative territory, with technology losing more than 7%. More value-oriented sectors outperformed as utilities and consumer staples both gained more than 1%. The kickoff to earnings season was also in focus as reactions were mixed from investors. Meanwhile, optimism surrounding artificial intelligence faded during the week, with both Nvidia (NVDA) and PHLX Semiconductor Sector (SOX) hitting correction territory from all-time high levels in early March. This move down by AI stocks has been a sharp and fast reversal of what appears to be a falling out of favor by momentum-oriented stocks. Back in the March edition of Investment Insights I wrote about the JPMorgan momentum crowding index reaching the 99th percentile, indicating severely overbought conditions for the factor index. It seems that now markets are reassessing the Fed’s rate-cut timeline; these momentum-oriented stocks are also undergoing repricing. This trend may continue to play out until there is greater clarity on inflation and more accommodative monetary policy.

This coming week will be busy as investors continue to digest a slew of corporate earnings reports and economic data. Headlining the earnings calendar will be several mega-caps, with Tesla, Visa, Berkshire Hathaway and Lockheed Martin reporting on Tuesday; Meta Platforms (formally Facebook) and Chipotle on Wednesday; and Merck, Google, Microsoft and Exxon Mobil to round out the week. Also garnering attention will be economic data with a focus on the Fed’s favored inflation gauge, the Core Personal Consumption Expenditures Price Index. Other notable releases include durable goods, consumer sentiment measured by the University of Michigan, and new and pending home sales.

Monday, April 22
Time Country Release Name For Consensus Prior
No releases scheduled
Tuesday, April 23
Time Country Release Name For Consensus Prior
8:55 US Redbook Chain Store 20-Apr
10:00 US New Home Sales Mar +670K +662K
16:30 US API Crude Inventories 19-Apr
Wednesday, April 24
Time Country Release Name For Consensus Prior
7:00 US MBA Mortgage Purchase Applications 19-Apr
8:30 US Core Durable Orders Mar 0% 0.70%
8:30 US Durable Orders ex transport Mar 0.20% 0.30%
8:30 US Durable Orders Mar 1.90% 1.30%
8:30 Canada Retail sales (m/m) Feb 0.10% -0.30%
8:30 Canada Retail Sales ex-Autos Feb -0.20% 0.08%
10:30 US DOE Crude Inventories 19-Apr
Thursday, April 25
Time Country Release Name For Consensus Prior
8:30 US Initial Jobless Claims 20-Apr +215K +212K
8:30 US Continuing Claims 13-Apr +1817.5K +1812K
8:30 US Wholesale Inventories Mar 0.30% 0.50%
8:30 US GDP (advance) Q1 2.20% 3.40%
8:30 US GDP Chain Price (advance) Q1 2.70% 1.60%
10:00 US Pending Home Sales Mar -0.80% 1.60%
10:30 US EIA Natural Gas Inventories 19-Apr n/a +50B
Friday, April 26
Time Country Release Name For Consensus Prior
8:30 US Core PCE Mar 0.30% 0.30%
8:30 US Personal Spending Mar 0.50% 0.80%
8:30 US Personal Income Mar 0.50% 0.30%
10:00 US Michigan Consumer Sentiment (Final) Apr 77.9 77.9


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