Taking Stock of the Current Market Selloff

Photo Credit: Claudio Schwarz, Unsplash

Weekly Market Recap for April 19, 2024

In recent weeks, uncertainty surrounding the macroeconomy and geopolitics has weighed down share prices, most visibly those of banks, semiconductors, and software companies, particularly small-cap stocks. Overall, price volatility has increased. In such an environment, investors would do well to stay with leading companies with proven earnings and cash-flow track records. 

S&P 500 Index (Last 12 Months)

S&P 500 Technical Composite (Last 24 Months)

Stock and Bond Selloff Continues

Since the start of April, stocks and bonds have mostly traded lower. The selloff has been relatively modest, at less than -5%, but it has been enough to break the steady uptrend off the November 2023 lows. Technical damage has been done, with the S&P 500 sitting below its 50-day moving average and significantly oversold near-term. Our view is that stocks could continue to trade lower in Q2, but we do not view the selloff as the start of a prolonged downturn.

We attribute the selloff to deteriorating liquidity and rosy investor sentiment. We are hesitant to attribute the selloff to a macro narrative, with the data hinting at a cyclical recovery. For the stock market to make new highs, earnings growth needs to meet expectations. For the selloff to continue, the next dominoes to watch for would be a deterioration in corporate earnings and the labor market. The sequence of events could occur as follows: lower stock prices and weaker earnings could lead to job cuts and a weaker consumer. We will be monitoring Q1 earnings and the coming monthly job reports. 

Can Yields Still Move Higher?

Yes, but the catalysts are shifting. As discussed below, yields on the front end of the curve are more realistic for the current state of the economy and the likely path of policy. However, the long end of the yield curve remains vulnerable to growing Treasury auction sizes, persistent inflation, and solid economic data, which continue to put upward pressure on yields. There is potential for the 10Y yield to rise above 4.50% this year, and with the recent spike in yields, the next major level could be 5.00% as trend followers jump on the trend. After the recent bond market selloff, we are willing to extend the duration, but only mid-duration. Mid-duration offers a middle ground: it provides a duration boost in case of a black swan event or market pricing back in rate cuts, but it does not leave portfolios exposed to the risk of a continued move higher on the long end of the curve.

Fed Policy

The market has lowered its expectations for rate cuts this year, and the higher-for-longer narrative is going mainstream. We believe the market's forecast and Fedspeak are nearing a hawkish peak. From a market point of view, investors only expect 1-2 rate cuts by year-end, down from six at the start of the year. Within the Fed, there is a hesitancy to hike rates further. The central bank's approach is asymmetric: it hesitates to raise rates despite recent inflation data but is open to cutting at the first sign of weakness. The credit market already appears to price in this reality, particularly on the short end of the curve, with the 2Y yield at a 5-month high.

2-Year Treasury Yield Rises to 5-Month High

Investors Only Expect 1-2 Rate Cuts Through Year-End

Economic Recap

This week's releases provided hard data that indicates monetary policy is being transmitted into the economy via tighter financial conditions. However, it's mostly confined to interest-rate-sensitive industries right now. We will monitor the upcoming monthly job reports and consumer spending for signs of a broader slowdown, but the economy continues to outperform expectations for now. Below is a summary of this week's key data releases:

Homebuilder Sentiment
Actual: 51 vs. Consensus: 51. Prior: 51. Commentary: It leveled off after four consecutive monthly gains but is still the highest reading since July 2023. It hints at continued housing demand but signals a pause as buyers evaluate where mortgage rates are headed.

Housing Starts
Actual: 1,321k vs Consensus: 1,480k. Prior: 1,549k. Commentary: The data missed expectations and fell by -14.7% m/m to the lowest level since June 2020. This indicates that the rise in mortgage rates during March has significantly weighed on housing activity, with building permits falling by -4.3% m/m, underscoring the impact of mortgage rates on the housing market.

Retail Sales (%m/m)
Actual: +0.7% vs Consensus: +0.4%. Prior: +0.9%. Commentary: The data beat expectations, with February revised up from +0.6% to +0.9%. This marks the 2nd consecutive monthly increase, indicating that consumers are continuing to spend despite the higher rates, highlighting the resilience of the retail sector in the current economic climate.

Industrial Production
Actual: +0.4% vs. Consensus: +0.4%. Prior: +0.4%. Commentary: This is the second consecutive month of expansion; manufacturing activity appears to be turning a corner (Figure 6), which syncs up with the rising ISM Mfg. PMI and our PMI Momentum Indicator forecast.

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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