Was this a change in the nature of the market last week, or is it still the same old bull? The late air pocket in indicators on Thursday makes the question at least worth asking. The setback in the S&P 500 ended an unusually long streak without a decline of at least 2%, dating back to last October. It was also the first time during the same period that the index failed to rebound from its 20-day moving average, a short-term tactical guardrail typically observed by the strongest rallies. .SPX 6M Mountain S&P 500, 6 Months The S&P rebounded 1.1% on Friday after a very strong employment report brought it back above that 20-day mark, but it wasn't enough to recover more than half of Thursday's intraday trading. It fell, leaving the index down about 1% for the week. The fact that even this much noise can be made from a 2% fluctuation after a 28% slope, says a lot about how strong this rally is. The chart below shows that the S&P 500's average daily movement over the 100 days prior to Thursday was near the lower end of the range over the past 100 years. A strong economy, rising earnings, benign Treasury yields, and very high dispersion between different groups and sectors have protected the leading index against many contrarian moves. This is generally a good thing, as boring markets are bull markets while they stay that way. However, estimates by Ned Davis Research, the source of the chart above, suggest that futures returns for stocks from such a calm starting point tend to be below average – although rarely or permanently devastating. Concerns about commodities and commodities prices Other asset markets were also at least raising questions about a potential shift in their character. The 10-year Treasury yield closed at 4.4% on Friday, its highest level since before the Federal Reserve's December meeting, at which Chairman Jerome Powell explicitly predicted potential rate cuts in 2024. It does not represent the absolute level. Returns in themselves are a major problem for the economy or stocks. Performance, though: A disorderly surge from here — in an uncomfortably hot CPI report, jitters over increased supply of Treasuries or something else — could trigger a scary flashback to last fall's interest rate panic. Likewise, WTI crude oil rose toward a five-month high above $85 per barrel, some of that appearing to be due to perceived threats to supplies. Here, as with Returns, the level is not inherently stressful. However, combined with accelerating copper prices and new highs in gold prices, this is striking a nerve in the market's fears that the decline in commodity inflation has stalled. @CL.1 1Y Mountain Crude Oil, 1 Year Such things may indicate a recovery on the production side of the global economy after a long period of distress. Although commodity prices are not the critical driver of lower core inflation expected in the future (things like shelter prices, used cars, and auto insurance), the reflationary message is fueling a collective rethink of what the Fed might do and why. The good news, he insisted, was that it wasn't really a Fed-driven market. Stocks have rallied a lot in the past few months even as the timing of expected interest rate cuts has been delayed and the amount of expected easing has been much reduced. The Fed's own framing of why it expects to cut interest rates soon — to reduce the 5.3% restriction on the federal funds rate in an economy operating at a sub-3% inflation rate — means investors can embrace economic numbers as good as Friday's. It announced a $303,000 payroll increase for March. The only good reason to worry about an impatient and indecisive Fed is that the economy has been weakening slightly under key data. The longer the Fed waits, in theory, for inflation data to fall into place, the greater the chance that it will eventually prove too gentle with its timing and stray too far from peak rates as growth falters (or the economy takes a hit of some sort). ). That's not the case at the moment, by most appearances, though some point out that the bulk of the job gains are coming among part-time workers and hints of consumer fatigue have been reported by many large companies in recent weeks. How long will the Fed stay on hold? The current backdrop is in some ways the exact face of the post-global financial crisis period of the 2000s. Right now, the economy continues to outperform prevailing expectations of a slowdown, while inflation is hovering above target, investors are over-expecting interest rate cuts, and the Fed is denied an open window to intersperse an aggressive tightening campaign with at least token easing measures. In the 2000s, we had the opposite: broad expectations that growth would rise toward long-term trend levels did not consistently materialize, inflation refused to rise near the 2% target, and bond market pricing continued to tighten that had been repeatedly postponed. In 2015, with the Fed signaling its desire to cut interest rates to zero, the economy was slowing and inflation was subdued, leaving the Fed to raise interest rates once in December of that year as a gesture of policy change. We are already in one of the longer periods with the Fed suspending maximum interest rates, for nine months. The consensus has become that any cut in interest rates in a better economy would not be good for stocks, and on the face of it this is true. Although it is easy to imagine that the market might be upset by this kind of balance of higher rates and higher growth if it continues for too long. Last week's market volatility had enough potential triggers, from Treasury weakness to ambiguous comments on Federal Reserve policy to a potential escalation of geopolitical conflict. The backdrop, though, was a market that entered the second quarter overbought, over-liked, and therefore vulnerable to a regular jolt to reset expectations and direct fresh eyes to valuation. Top of the market? The difference between bulls and bears among advisory services surveyed by Investors Intelligence was up in the air last Wednesday. Here again, it raises the “hedonic threshold” among investors and often means increased downside risk or moderate returns (on average). However, in bull markets, this level of uptrend can continue for a while without nasty contrarian effects. However, the bulls broke their stride last week, ending one of the 13 longest streaks ever in statistically overbought territory, according to Bespoke Investment Group. The company notes that after previous overbought lines expired, the S&P 500 rose only a quarter of the time over the following week and also posted a one-month average decline. While performance over three months to one year is positive and more often than not, the median and median performance is weaker than usual.” It is a bull market, and its range has widened impressively in recent months, with cyclical sectors leading and thus sending With a reassuring macro message, this highly metabolic economy is moving faster than 5% of nominal GDP. One-year forward earnings estimates are still rising, and the downward revision of first-quarter forecasts over the past three months has been less severe than the average downward revision during the quarter. , according to FactSet. “The bull market is over because the economy stayed in very good shape” is a highly unlikely outcome, although higher real interest rates, more challenging valuations and bumpy seasonal patterns can serve as good excuses for gut checks. The S&P 500 is now back to levels it first reached on the day of the Fed's decision on March 20, with the hottest groups cooling off and professional investor positions coming off the boil, according to Deutsche Bank.All performance-based analysis related to the current rally – How it's trending The market is done after five consecutive months of gains, after achieving a new high for the first time in more than a year, following a 10% gain in the first quarter. “It is strongly implied that this is unlikely to be a punitive market top. This is not the same as saying that the path from here will remain as smooth, rewarding and risk-free as it has been since Halloween.”
