Broker Check

Market Insights – Week Ending April 19, 2024

April 22, 2024

Key Takeaways:

  • Elevated treasury yields pressured equities as strong economic data continues to temper rate cut expectations.
  • Mega-cap and semiconductor names lower after mixed earnings guidance spurred some profit-taking.
  • Despite negative bias, market breadth reflected buying interest, particularly from strength in financials and consumer staples.

In Perspective –

The market’s recent pullback from all-time highs has prompted some knee-jerk selling reactions – as long-term investors, it is important we keep everything in perspective. This can be easier said than done as our natural inclination towards loss aversion can leave us vulnerable to our emotions - especially during periods of perceived volatility.

The routine reminder is that market pullbacks of 5-10% are normal and expected – particularly given current market conditions. Unfortunately, these pullbacks can feel worse to us than recent gains and cause people to make crucial investing mistakes.

While loss aversion is primarily a detriment in terms of causing investors to prematurely exit the market, it is also used as a reason to stay in cash or sit on the sidelines. When the market is at all-time highs, the natural thought is that the market is too expensive, and it would be better to wait for a better time to invest. This is a product of another type of bias called recency bias. Many investors quickly recall periods of market turmoil, such as the Dot-com bubble, the Great Financial Crisis, and the Pandemic – sparking fears and causing a hesitation to invest.

Despite this, market history has demonstrated that since the 1950s, all-time highs tend to set a ‘market floor’ (left chart). Although not known at the time, the all-time highs set would turn out to be some of the best entry points you could have asked for.

The chart on the right compares the average return of the S&P 500 from investing on any given day versus an all-time high – which are comparable and, interestingly, better in some instances.

The takeaway is to avoid market pitfalls by not only regulating our emotions during market pullbacks, but by consistently acting on our financial plans and continuing to invest – particularly during periods of volatility.

Market Summary –

With earnings season well underway, equity markets experienced some downside bias as treasury yields rose in response to persistent inflation and exceedingly strong economic data pointing towards the likelihood of higher-for-longer rates. Notably, the 2-year note hovered around 5% with the 10-year note above 4.5%. In line with this narrative, mega-cap and growth-oriented names that have benefited the most from previous rate-cut expectations have now given some appreciation back. Mega-caps traded down in sympathy with several semiconductor names – particularly Nvidia (NVDA), which was absent of any company specific news. Some of the negative bias was also likely due to buying hesitation ahead of major earnings releases next week along with Israel’s retaliation in response to Iran’s attack from the previous weekend.

On the economic front, retail sales for March increased 0.7% month-over-month, well above expectations and following February’s upwardly revised 0.9% increase. Strong consumer spending, supported by an exceedingly strong labor market, is a key component for a soft landing. While this is good news for earnings, it is not necessarily good news for the stock market in the near-term due to the increased likelihood of rates being held higher-for-longer. Fed Chair Powell reiterated that the Fed is not in a rush to prematurely cut rates and that if higher inflation persists, the Fed will maintain its restrictive policy for as long as needed. The expectation is for the Fed to hold rates unchanged at the next FOMC meeting on May 1st.

On the earnings front, 70% of the S&P 500 companies that reported this week beat estimates. Notable names include Goldman Sachs (GS), UnitedHealth (UNH), American Express (AXP), and Procter & Gamble (PG) – which were all supportive of their respective sectors and helped draw buying interest amidst weakness in the mega-cap and semiconductor spaces. The theme thus far is that the strong economy is indeed supportive of strong earnings growth, but that the earnings reports themselves are not necessarily moving the needle in terms of positive price action. Investors seem to be holding high expectations and any signs of forward-looking weakness are being punished to a greater extent than positive earnings surprises. 

Chart of The Week – Staying Invested

The chart below demonstrates why successful long-term investors avoid near-term reactions to volatility. Historical returns for a regularly rebalanced 60/40 stock and bond portfolio show that both returns and volatility stabilize over time. The takeaway from this and the previous chart is how important it is to stay invested, whether the market is at its perceived top or bottom.

Time in the market is the key differentiator between successful investors and those who try to forecast and time the market.

 Week Ahead –

This week, earnings will take the front seat with the likes of Microsoft (MSFT), Alphabet (GOOG), Meta (FB), and Tesla (TSLA) reporting – along with about 40% of the S&P 500. Other market moving data will focus on the Fed’s preferred gauge for inflation, the PCE Price index, on Friday. 


As always, if you have any questions or comments please do not hesitate to reach out.

 

Respectfully,

Michael Neill, CFA

Sources:

Chart 1

Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. 

(Left) *Market floor is defined as an all-time high from which the market never fell more than 5%. (Right) **"Invest on any day" represents average of forward returns for the entire time period whereas "Invest at a new high" represents average of rolling forward returns calculated from each new S&P 500 high for the subsequent 3-months, 6-months, 1-year, 2-year and 3-year intervals, with data starting 1/1/1988 through 12/31/2023.

Guide to the Markets – U.S. Data are as of March 31, 2024.

Chart 2

Source: Bloomberg, FactSet, Federal Reserve, Robert Shiller, Standard and Poor’s, Strategas/Ibbotson, J.P. Morgan Asset Management.

Returns shown are based on calendar year returns from 1950 to 2023. Stocks represent the S&P 500 Shiller Composite for periods prior to 1936 and the S&P 500 thereafter. Bonds represent Strategas/Ibbotson for periods prior to 1976 and the Bloomberg Aggregate thereafter. Growth of $100,000 is based on annual average total returns from 1950 to 2023.

Guide to the Markets – U.S. Data are as of March 31, 2024.

Advisory services provided by NewEdge Advisors, LLC doing business as Marathon Financial Group, as a registered investment adviser.  Securities offered through NewEdge Securities, Inc., Member FINRA/SIPC. NewEdge Advisors, LLC and NewEdge Securities, Inc. are wholly owned subsidiaries of NewEdge Capital Group, LLC.

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