April 26, 2024
Markets have been very volatile lately.
Let’s take a quick look at the factors that are influencing markets right now.
1. The bull market narrative has shifted
For months, investors and the media have told a “Goldilocks” story of a strong economy, tamed inflation, and interest rates soon to drop.
However, stronger-than-expected economic data and sticky inflation have complicated the story, and investors have become rightfully wary of some of those ideas.
There are still plenty of reasons to be optimistic. As of April 24th, 188 of the 500 S&P 500 companies had reported earnings, and those were up over 8% year over year. Twenty-seven of the Nasdaq 100 companies have reported earnings growth of over 27% year over year as well. Still, investors are being careful and taking in recent higher-than-expected (not higher-than-we-expected) inflation data to gauge the upside potential of the next weeks and months.
2. Interest rates are likely to stay higher longer than the many market participants expected (or wanted)
We have been saying for months that the conditions were not ripe for an interest rate cut. A strong economy and hot inflation mean the Fed is now getting cold feet about cutting interest rates.
Recent comments by Fed chair Jerome Powell suggest the Fed will keep rates high until economists are confident inflation is in decline. Our data shows that inflation is not declining but is accelerating and will continue for at least most of the summer months. This is the reason you have seen us buy areas of the market (energy, insurance, commodities) that will do well in a higher inflation environment.
Some analysts are now even pricing another rate hike if inflation remains high. We don’t know if we will see interest rate increases this year, but our base case is no rate cuts for the rest of the year.
Since many investors have been relying on rate cuts coming soon and often have investment strategies fueled by cheap capital and the usage of leverage, the new “higher for longer” reality is causing them to reevaluate their positions, further stoking volatility.
3. Geopolitical flare-ups are causing tensions to rise
It’s concerning to see the ongoing tensions between Israel and Iran and the escalating situation in Ukraine. It’s heartbreaking to know that so many lives are at stake. However, there is some hope—historically, geopolitical shocks usually only cause temporary disruptions in the markets. Despite this, it’s important to remember that the ultimate priority is the safety and well-being of all involved. Let’s hope and pray for a peaceful resolution to these conflicts.
4. Volatility is normal after a prolonged rally
Volatility after a strong rally is quite common, and this is particularly true when investors are analyzing the earnings reports from the previous quarter and reevaluating company performance. But since the U.S. economy is in good shape, with a robust jobs market and healthy consumer spending, the chances of a correction leading to a significant downturn seem minimal.
We’re monitoring markets and will contact you if a strategy change is warranted.
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