Have recent declines ended the rally in US stocks?

Have recent declines ended the rally in US stocks?

The U.S. stock market has seen sharp declines in more than one session over the past week, sometimes as inflation rose above expectations and sometimes as the results of some financial institutions' operations for the first quarter of the year were announced. , which fell short of expectations, and then some wondered if the strong wave of unrest that had begun five months earlier was about to subside, amid fears of an escalating war in the region.

After the US economy recorded the highest growth rates among major economies, the stability of the labor market and fears of entering a recession disappeared. A decline in inflation indicators in the country and growth in corporate profits in the quarter have raised expectations that the Federal Reserve will initiate a new wave of interest rate cuts, the first since a year. pandemic, which saw record levels for major stock indices.

While most of these are still true or justified, the CPI's third straight reading for the month reminded markets of volatility in bond yields, giving added impetus to the resurgence of preference to invest in defensive assets like gold. On Wednesday, the yield on ten-year U.S. Treasuries rose above 4.55% for the first time since mid-November.

Over the weekend, the S&P 500 fell more than 1.5%, and Friday was its worst day since January. Two other indexes were in the red on a weekly basis, with the Dow Jones Industrial Average down 2.37% and the Nasdaq down 1.62%. The Dow Jones recorded its ninth straight day of decline in the last ten days of trading, indicating a shift in investor sentiment on the stock.

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A week after the S&P 500 ended its first 2% decline in more than five months, it touched its 50-day moving average for the first time since November, an early sign of a possible change in market sentiment. However, the broad index of U.S. economic sectors rebounded from this line and closed above for the 110th consecutive session, one of the ten longest such surges in the past 80 years.

After declining confidence that the central bank will begin a rate-cutting cycle in June, analysts believe the current market is not dependent on the central bank for its hikes, meaning it “doesn't need” to cut interest rates sooner or stronger, given the strength of… the economy. That doesn't mean the market can ignore scenarios where the Federal Reserve could pull back from easing its open monetary policy this year.

For the Federal Reserve to move forward with interest rate cuts, it would need to show some additional decline in inflation, which most policymakers expect will total 0.75% over three terms this year. But any sign of a further pick-up in inflation indicators could bring the number of cuts expected this year to “zero”.

In the first three quarters of last year, Fed Chairman Jerome Powell routinely said the economy needed to be “below its potential for a long time” to contain inflation. He often pointed out that inflation in the service sector was caused by the wage model, and more than once pointed out that the labor market needed a lot of easing to lower interest rates.

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Powell expected the unemployment rate in his country to rise to 4.5% before the inflation rate reached its target level of 2%.

For these reasons, a solid decline in inflation by November, a sharper-than-expected decline by the central bank, immediately freed Wall Street to interpret good economic news as good news for stocks. This dynamic has yet to reverse.

As volatility in the bond market rises, the stock options and futures markets are awash with hedging activity, a sign that traders are eager to pay to protect their gains. Gold has risen almost vertically this month, with massive trading volumes in gold equity (GLD) ETFs. On Friday, gold prices rose to $2,440 an ounce from $2,400 an ounce, before reaching $2,360.

This volatile movement between assets reflects a clear rise in trader anxiety and the rebuilding of the wall of doubt. In a lengthy analysis of the U.S. stock market that aired on the CNBC Economic Network, the network's analysts said the current stock market is a bull market and that the rising tide has reached its peak. The hikes are overrated.

They pointed out that the bullish wave has been expanding among stocks and various sectors since mid-October, saying, “The trend is upward, and extreme movements are occurring in an upward direction, and declines are common, and investors see them as new opportunities to enter the market.”

They said the continued extraordinary strength of the market and the widening scope for growth, with 10% growth in two consecutive quarters from October 2023 and no decline of 2% on any day in five months. As of March, it is strongly suggested that the final peak is not reached based on many studies of previous markets.

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More importantly, the central bank's inflation target of 2% is primarily based on the level of private consumption expenditures, whose weight on consumption is lower than the CPI. Economists believe that underlying annual gains in personal consumption spending will reach around 2.8%, and the report will be officially released within two weeks.

With the average number of interest rate cuts expected three times this year, central bank members' median forecast for core personal consumption spending at the end of the year is 2.6%. The gap to deliver on the promise of three cuts still doesn't look great.

“Markets have priced in the moderate scenario occurring this year, with 'good but not so good' news exposing the market to further downside risks,” Citibank equity strategist Scott Kroenert told CNBC on Friday. Enough”.

The S&P 500 closed Friday at about the same level it had five weeks earlier, March 8, representing a moment of peak investor confidence in the “we can have it all” thesis. A day earlier, Powell said the Fed was “not far away” from cutting interest rates. Eight days later, a near-perfect jobs report reinforced the consensus that the Fed could achieve a soft landing.

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