It’s Not Because of What You May Think
By John Lau
February 14, 2024 – Stocks dropped sharply yesterday when the CPI numbers came in “warmer than expected”. But yesterday’s CPI did not really show any signs of reversal on disinflation. Instead, it simply reminded us that the S&P 500 at 5,000 is priced for perfection, and the CPI number simply reminded us that things are not as perfect as what the market was hoping.
Here is essentially the problem: The entire market runup since October has been based on the idea of: 1) March Fed rate cuts, 2) Continued disinflation and 3) A decline in the 10-year yield that helps increase the market multiple. All three of those have reversed back to December or November levels yet the S&P 500 remains 8% higher than it was in December. According to Fed Funds Rate Futures, Fed rate cut expectations are now for three to four cuts (vis-à-vis five to six cuts), which is the same level it was late last summer, when the S&P 500 was trading around 4,400. The 10-year yield is now back to where it was during the first week of December, when the S&P 500 was trading around 4,500. And inflation has essentially gone nowhere since October with Core CPI sitting at 3.90% y/y versus 4.0% y/y in October, yet the S&P 500 has rallied from 4,400 to 5,000 over that timeframe. As happened before, the magnitude of the rally in the last few months has been due mainly to hope and expectations, and if those reasons for the rally are challenged, I believe we could see a 3%-5%-ish pullback. Now, to be clear, this does not mean the medium- or long-term outlook has shifted materially bearish and it does not mean the outlook is much more negative than it was. But what it does mean is that the CPI report is the first economic report of this year to challenge the market’s outrageously positive assumptions, and as a result, we could see give back in markets as it reprices a new macro reality—one that is still good, but not as positive as the market had hoped. In this potentially declining market environment we are considering various risk management strategies aimed at reducing portfolio risk for our clients, where appropriate.
Bottom line, this report confirmed what we saw in other data such as the ISM Manufacturing and Services indices; while it shows that headline inflation is still declining, the market was expecting more and the market reaction was clear disappointment, as Treasury yields surged to a multi-month high while stocks dropped sharply in response, and investors dropped rate cut expectations for May below 50%, delivering a blow to “dovish Fed” market expectations.
Our clients rely on us for timely information, and our job is to deliver.
Disclosures:
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. Please consult with your investment, tax and legal advisors in regard to your own personal circumstances. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Investing entails risks, including possible loss of principal. Past performance does not guarantee future results. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
Why Did Stocks Drop Yesterday?
It’s Not Because of What You May Think
By John Lau
February 14, 2024 – Stocks dropped sharply yesterday when the CPI numbers came in “warmer than expected”. But yesterday’s CPI did not really show any signs of reversal on disinflation. Instead, it simply reminded us that the S&P 500 at 5,000 is priced for perfection, and the CPI number simply reminded us that things are not as perfect as what the market was hoping.
Here is essentially the problem: The entire market runup since October has been based on the idea of: 1) March Fed rate cuts, 2) Continued disinflation and 3) A decline in the 10-year yield that helps increase the market multiple. All three of those have reversed back to December or November levels yet the S&P 500 remains 8% higher than it was in December. According to Fed Funds Rate Futures, Fed rate cut expectations are now for three to four cuts (vis-à-vis five to six cuts), which is the same level it was late last summer, when the S&P 500 was trading around 4,400. The 10-year yield is now back to where it was during the first week of December, when the S&P 500 was trading around 4,500. And inflation has essentially gone nowhere since October with Core CPI sitting at 3.90% y/y versus 4.0% y/y in October, yet the S&P 500 has rallied from 4,400 to 5,000 over that timeframe. As happened before, the magnitude of the rally in the last few months has been due mainly to hope and expectations, and if those reasons for the rally are challenged, I believe we could see a 3%-5%-ish pullback. Now, to be clear, this does not mean the medium- or long-term outlook has shifted materially bearish and it does not mean the outlook is much more negative than it was. But what it does mean is that the CPI report is the first economic report of this year to challenge the market’s outrageously positive assumptions, and as a result, we could see give back in markets as it reprices a new macro reality—one that is still good, but not as positive as the market had hoped. In this potentially declining market environment we are considering various risk management strategies aimed at reducing portfolio risk for our clients, where appropriate.
Bottom line, this report confirmed what we saw in other data such as the ISM Manufacturing and Services indices; while it shows that headline inflation is still declining, the market was expecting more and the market reaction was clear disappointment, as Treasury yields surged to a multi-month high while stocks dropped sharply in response, and investors dropped rate cut expectations for May below 50%, delivering a blow to “dovish Fed” market expectations.
Our clients rely on us for timely information, and our job is to deliver.
Disclosures:
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. Please consult with your investment, tax and legal advisors in regard to your own personal circumstances. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Investing entails risks, including possible loss of principal. Past performance does not guarantee future results. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
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