April 22, 2024

“Sell a stock only when you find a new stock that is 50% better bargain than the one you own.”

Sir John Templeton

Well, we finish last week with the S&P 500 posting its 3rd straight week of losses and along with the Nasdaq six days in a row in the red. Here are the numbers. The S&P 500 lost 3.54% for the week, the Dow Jones, which rallied on Friday fared better, losing only .23%, the biggest loser was the tech heavy Nasdaq which dropped 6.11% for the week. Internationally, markets performed a bit better with the FTSE 100 losing 1.25% and the MSCI-EAFE off under 1%. The 2 Year Treasury yield climbed back to within striking distance of 5% closing at 4.988%, and the 10 Year followed suit with a yield of 4.621%.

After a fabulous first quarter, what happened? The under reported story of the Israeli response to the drone and rocket attack caused great fears on Wall Street of a widening war followed by a predictable jump in oil prices further stoking great uneasiness. The good news, the Israelis after effectively thwarting the attack, (where the Iranians could hit the broad side of a barn) and all projectiles being shot down, Israel then launched a “measured” response demonstrating their capabilities to the Iranians that they could hit any target anytime they pleased in Iran. The hope is that this lopsided result will serve as a deterrent for anymore Iranian aggression and, in short, relieve the widening war possibilities and tensions. It seems so far, the Iranians are getting the message. This judging from the downplaying by both sides in the post attack reporting.

It was a bad week for stocks, particularly for the AI-focused tech stocks that have rallied for much of the last 18 months, which led the declines. So far, earnings season hasn’t managed to calm fears. But next week brings another opportunity to focus on corporate fundamentals with some 150 S&P 500 companies scheduled to report, including many of tech’s largest names. The bright spot in all the turmoil last week was the Big Banks, America’s biggest banks dominated corporate debt issuance. New bond deals totaling about $28.5 billion were issued by four of the nation’s six largest banks: JP Morgan Chase & Co. JPM, +2.51%, Wells Fargo & Co. WFC, +2.74%, Goldman Sachs Group Inc. GS, +0.22% and Morgan Stanley MS, +0.44%, according to Kenneth Jacques, head of U.S. credit at Informa Global Markets. However, warnings from the Federal Reserve about stalling inflation and potential delays to its plans to cut rates won’t help banks saddled with commercial real-estate loans coming due. Fortunately for the big banks that is not their big exposure, not so true for the regionals which have far more commercial real estate debt on the books.

After a protracted lull, volatility across markets has reawakened in April as Wall Street’s “fear gauge” has surged to its highest level since Halloween.

As MarketWatch reported, The CBOE Volatility Index VIX, known as Wall Street’s “fear gauge,” traded as high as 19.56 last Tuesday, its highest intraday level since Oct. 31, bringing it to within a whisker of its long-term average of 19.60. Volatility gauges tracking activity in options markets tied to Treasury bonds and major G-10 currencies have also shot higher this month. The ICE BofAML MOVE Index, (a measure of implied volatility of Treasuries) had reached a two-year low as recently as March 27. But the index has risen more than 40% since then to close at 121.15 on Monday, its highest level since Jan. 3, according to Dow Jones Market Data. This uptick reflects investors’ increasing uncertainty surrounding the outlook for previously mentioned interest-rate cuts by the Federal Reserve, as Fed Chair Jerome Powell confirmed on Tuesday that the central bank will likely hold off on plans to cut rates.

Now traders expect that the European Central Bank and others could beat the Fed to the punch, which has pushed Treasury yields higher while fueling a rapid advance in the U.S. dollar DXY in April, strategists said.

On the inflation front… Inflation readings have come in consistently higher than expected for the first three months of the year, and U.S. economic growth is now expected to perform better than previously thought in 2024. On average, economists polled by the Wall Street Journal estimate that the economy grew at a 2.2% real annualized rate during the first quarter and should grow by 1.4% in the third quarter, before picking up slightly to 1.5% in the final three months of the year.

Good news on jobs…The number of Americans who applied for unemployment benefits last week was unchanged at 212,000, reflecting a surprisingly resilient labor market in which layoffs and unemployment remain very low. New jobless claims fell in 32 of the 53 states and territories that report these figures to the federal government, most notably New Jersey. Claims rose slightly in 21 other states.

Other good news? Consumer spending, the main engine of the economy, has risen by an average of 2.8% a quarter in the past year after accounting for inflation. That’s half a percentage point faster than from 2010 to 2019.

So, is this a bump in the road of the start of a much bigger pull back? Well last Wednesday the Federal Reserve released the ‘Beige book” Overall, the Beige Book offered some good news about the economy. The report showed that U.S. economic activity has expanded modestly from late February to early April, with businesses reporting they are “cautiously optimistic” on the outlook. The five-day declines for the S&P 500 have accelerated to a point where a rebound is likely. The five-day rate of change of minus 3.6% has been seen seven times since October 2022. The fundamental case for stocks in 2024 remains intact, supported by strengthening earnings and the $6 trillion of cash on the sidelines. So, we will see, but our overall cautious stance will continue.

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Mike