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Market Insights - Week ending April 5th, 2024

Market Insights - Week ending April 5th, 2024

April 10, 2024


Market Summary –

The start of the second quarter was met with some volatility in response to elevated market rates, strong economic data, and Fed commentary. The S&P 500 ended the week slightly lower as market participants may be starting to react to what has largely been ignored throughout the first quarter – that is the market reaching all-time highs on continuous momentum in the face of higher-for-longer interest rates and delayed rate cuts. It should be no surprise that rate cut expectations were adjusted again following commentary from Fed officials on Thursday, signaling the potential for the Fed to not cut rates at all this year if the downtrend in inflation stalls.

Still, the market ended on a positive note after a stronger than expected jobs report. Following the previous week’s sticky inflation figures, the strong employment report for March supported equities on Friday as participants interpreted a strong labor market as a boon for corporate earnings growth, rather than a negative in terms of it justifying further delays in Fed rate cuts. While equities have largely glossed over the threat of higher-for-longer rates due to strong economic data supporting earnings growth, treasuries have reacted appropriately with the 2-year and 10-year note increasing to 4.72 and 4.33%, respectively. Higher market rates pressure equities and will be a consideration as participants gauge valuations.

Rhetoric from Iran this week also reminded the market of geopolitical uncertainty stemming from the Israel-Hamas conflict in terms of the potential for a broader conflict – a theme that has contributed to the quiet rally in oil prices over the last quarter.

As we discuss these weekly topics, it is always from the lens of a long-term investor. Observing weekly market activity can easily lead to thinking that the market is more volatile than it is. With last week showing a glimpse of downside volatility that we haven’t seen in a while; it is important to remind ourselves to avoid trying to forecast the unknown. Market volatility is normal and should be viewed as an opportunity, rather than something to be fearful of.

Key Takeaways:

  • The S&P 500 ended the week on a positive note, but slightly lower, declining -1.0%.
  • Fed commentary on Thursday sparked a jump in treasury rates signaling a potential further delay in rate cuts.
  • Investors viewed strong economic data as a positive for corporate earnings, rather than a negative in terms of rate cuts.

 

Fed Policy & Economy –

The strong labor market and resilient consumer continue to support the equities amid the recent aggressive policy tightening measures by the Federal Reserve. The unemployment rate remains historically low, falling to 3.8% in March from 3.9% in February. The US economy added 303,000 jobs in March, the most in ten months, with leisure and hospitality employment returning to its pre-pandemic level.

Last year, the market would have interpreted strong employment data as a negative for equities due to the notion that it would prompt the Fed to raise rates. Now, the expectation is for peak interest rates with rate cuts to begin at some point. While the market has needed to quickly adjust the timing of rate cuts, it has not significantly impacted equity markets due to the view that the economy is doing well, which is a positive for corporate earnings growth and shows that companies are adapting to the higher interest rate environment 

If market participants retain this view – equities have room to move higher. To put another way, the market does not necessarily care if the Fed cuts rate three or two times in 2024 – but what would likely impact prices is if the Fed made zero rate cuts, an idea suggested by Minneapolis Fed President Kashkari, if inflation remains stubbornly high.

 

Chart of The Week – S&P 500 and 10-Yr Treasury Note

With first quarter earnings around the corner, the market is placing confidence in the economy and earnings estimates. Higher-for-longer rates and delayed rate cuts have caused an uptick in treasury rates (Light Blue Line) – something that would traditionally impact equity prices. This year, the S&P 500 (Dark Blue Line) hit record highs as market rates were increasing. The main reason for this is that participants are placing more weight on the unusual strength of the US economy during the recent Fed tightening cycle. While the stock market is not the economy, economic activity is the primary driver behind earnings and earnings growth propels the stock market.

Week Ahead –

This week, first quarter earnings will gradually begin with several large banks reporting on Friday. This earnings season will be the next test for the equity market as participants wait to see if strong economic growth is translating into strong earnings guidance. On the economic front, inflation figures for March will be released on Monday along with PPI (producer price index) on Thursday and the Michigan Consumer Sentiment survey on Friday.


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

 

Respectfully,

Michael Neill, CFA