April 18, 2024
Good morning,
Finally, an equity market pullback. Almost on cue, as the 2nd quarter got underway and investors had been enjoying 5 months of historically low downside volatility, the S&P 500 Index (SPX) began its overdue pullback. It has not endured a -3% pullback (a minimum threshold by definition) since 10/27/2023 – 105 days puts this stretch in the historically long category. More on this down below.
Stronger-than-expected jobs, manufacturing, CPI, and retail sales data suggest that inflation is sticky enough and economic growth is solid enough for the Fed to wait for more evidence before cutting its target rate. Both the two-year and 10-year Treasury yields have hit five-month highs.
Good economic numbers, matched by a decent start to Q1 earnings season, should not be reasons for a significant sell-off. But overly bullish sentiment left little cushion for uncertainty – enter growing geopolitical instability and a pullback has begun.
Historically, early pullbacks following strong uptrends (SPX up 25% in 5 months qualifies) are typically short and shallow and occur in the early stages of a recovery cycle. However, short and shallow doesn’t hold up to historically long periods of low downside volatility (above), late in a recovery cycle, which is where we are.
Given the offsetting historical records for pullbacks, we’re left with closely monitoring the technical damage as the full extent of the pullback/correction unfolds. The good news, technically, is the sentiment is no longer bullish – so we’ve got that going for us. Short-term indicators have broadly reversed – that happens in most pullbacks. If the longer-term technical measures begin to signal caution, we’ll interpret that as worse than a correction ahead.
Below are the various equity indexes performance numbers since the start of April.
As is so often the case, this pullback feels worse than the numbers may reflect. Unfortunately, our pullback probably has more to go. We are in a seasonally difficult period of markets due to low liquidity that lasts until June. One reason is that investors need funds to pay taxes. Unlike last year, investors had plenty of capital gains taxes to pay this tax season.
On Monday, we’ll look at the bond market and where yields may be going. Have a good weekend.
Be well,
Mike
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