Yesterday, US stock indices sold off sharply soon after the open, but quickly recovered most of their losses ahead of the European close. Investors were spooked by a sharp jump in bond yields which saw the 10-year Treasury close at 4.16%, having been at 3.86% just a few days ago. Investors have been repricing everything since Wednesday’s Fed meeting and Friday’s Non-Farm Payroll surprise. Finally, they are listening to what the Fed has been saying for months now. Fed Chair Jerome Powell hammered home the message that the central bank needs to see more evidence of a sustainable fall in inflation before it will cut rates, and that is very unlikely to be in March. At the same time, the unemployment rate remains very low, especially considering that rates are at their highest level since 2001, and the economy is proving extremely robust. Markets are adjusting. According to the CME’s FedWatch Tool, the May Fed meeting is now the favoured time for the first cut, although June seems more reasonable based on the Fed’s comments. In addition, the market is now pricing in rate cuts of between 100-125 basis points this year, down from 150 last week.
The daily chart of the S&P 500 above shows a market that continues to build on the rally that began in October 2022, peaked ten months later, fell sharply for the next two months before finding a bottom and tearing off again. You could argue that the rally since last October is looking overheated, overbought and overdue a correction. But the latest impetus comes as investors have found a new reason to increase their exposure. They are no longer buying on the hopes of imminent and aggressive Fed rate cuts. Instead they are buying stock on the basis that companies can do well in the current economic environment, even with rates as high as they are, which, historically, isn’t particularly high, and not particularly restrictive. Maybe investors are getting too cocky. While the S&P is closing in on a new milestone of 5,000, it’s worth remembering that much of the stock market’s strength is driven by a small number of stocks. There remains a lack of market breadth.
The daily chart of the S&P 500 above shows a market that continues to build on the rally that began in October 2022, peaked ten months later, fell sharply for the next two months before finding a bottom and tearing off again. You could argue that the rally since last October is looking overheated, overbought and overdue a correction. But the latest impetus comes as investors have found a new reason to increase their exposure. They are no longer buying on the hopes of imminent and aggressive Fed rate cuts. Instead they are buying stock on the basis that companies can do well in the current economic environment, even with rates as high as they are, which, historically, isn’t particularly high, and not particularly restrictive. Maybe investors are getting too cocky. While the S&P is closing in on a new milestone of 5,000, it’s worth remembering that much of the stock market’s strength is driven by a small number of stocks. There remains a lack of market breadth.