April 22, 2024
Good morning,
For equities this morning, there isn’t much to add to last Thursday’s Morning Note, except that the pullback in prices has continued. The S&P 500 Index (SPX) was down -3.05% last week and broke the next threshold level of -5%. By definition, a “Correction” is >-5%. The SPX has now retreated -5.4% from its high; it is the longest stretch without a correction since January 2018.
Yields have not stopped climbing yet, and I suspect that stocks won’t stop correcting until they do. It is clear now that it will take more time for the Fed to achieve greater confidence in hitting their inflation goal than had been expected.
Powell has argued that the Fed “can maintain the current level of restriction for as long as needed.” He wants to “allow restrictive policy further time to work.” Translation: he thinks rates are currently restrictive and rate hikes are not being considered. It makes the 2yr Treasury attractive above 5% (closed Friday at 4.98%). Maybe the bond market has pushed yields up too high in the process of backing out all those rate cuts they were expecting. And while yields likely won’t start declining again until inflation data does, there is a good argument that yields are high enough at current levels. It may be a case of damage done. It just may be a while (wks./mos.) until repair begins.
Be well,
Mike
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