April 14, 2024
Weekly Market Outlook
By Donn Goodman
Welcome back loyal readers to the weekly Market Outlook. We hope you had a good week, albeit a turbulent and difficult week for investors in the market.
The surprising (and unexpected) headline Wednesday morning on the CPI (Consumer Price Index) released at 8:30 a.m. EST, came in at 3.5% for March, significantly higher than February’s 3.2% (which was higher than expected in February).
This shocked the stock and bond markets and indicated that inflation is proving “stickier” than the Fed would like.
The market was down over 1% on Wednesday for most indices (down over 2% on small-cap stocks). However, a meaningful rally on Thursday recovered most of that down move from the day before.
On Friday morning, the PPI came out much more tame (good news). However, headlines regarding bank earnings, tensions in the Mideast, higher than expected interest rates, and negative earnings expectations heavily driven by JP Morgan’s earnings conference call spooked the market yet again. The markets gave up all of Thursday’s gains plus some.
For the week, the S&P was down -1.5%, the NASDAQ 100 was only down 0.50%, but small-cap stocks (IWM) sank the most at -2.8%. That makes sense, given the much greater dependence that smaller companies have on interest rates. See chart below:
Fixed income funds and anything related to interest rates (small & midcap stocks) were most effected this past week. We wanted to illustrate just how quickly the 10-year interest rates reacted to the higher CPI number that came out. We illustrate this in the two charts below. The first is the most recent action since April 1 and the second is the rise in interest rates since January 1, 2024.
Since April 1, 2024, the 10-year interest rate has increased 5%. See below:
Since January 1, 2024, the 10-year interest rate is up 20%
In the grand scheme of things, we are still close to new all-time highs set by the S&P 500 on March 28, 2024. Since then, we have seen a pick up in volatility and the daily market swings, but we are only down -2.3% since hitting the last all-time highs on March 28, 2024. Putting this in perspective is Ryan Detrick’s chart below:
The S&P 500 has still only had a 2.5% peak-to-trough move in '24.
This would tie it with '95 for the smallest ever.
The reality is more pain at some point this year would be perfectly normal.
Remember, as strong as last year was, stocks still saw a 10.2% correction.
Are we in for more downside? We will explore this shortly.
Who are you to believe?
There is a ton of news out there daily with contrarian points of view about our economy, inflation, debt, the markets, geopolitical risks, and an additional handful of potentially market moving data. Then there is what the Fed says.
Between Mish’s daily (you should be a subscriber and if you are not, why not? Go here to sign up for her daily musings and this weekly Market Outlook, as well as our vital BIG VIEW tools, you should have all you need to make intelligent investment decisions.
Add to that our easy to navigate, consistent outperforming investment strategies (with risk management) and you are well prepared to maneuver these markets and game plan for what might occur if we get into more difficult market conditions.
Starting late last year both Mish and I were redundant in our calls for “Higher for Longer” with respect to interest rates as well as inflation. We both repeated this mantra over and over. Mish was very clear when she laid out her projected path that historically inflation is stickier than investors are expecting. Inflation doesn’t just disappear overnight. Additionally, with all of the Government spending continuing, there is still an abundance of quantitative lubricant in the economy that will show up as inflationary.
Going back to the fall of 2023, we indicated that inflation was around for a much longer time than the deceleration that the analysts and pundits were projecting. Moreover, both in late 2023 and early 2024 we suggested that our opinion is that interest rate cuts would come later in 2024 and not be anywhere close to 6-7 times.
Since the beginning of the year, we were unequivocal in our belief that interest rate cuts wouldn’t happen until after midyear. The last two weeks (you can access the Market Outlook for the past two weeks here) we suggested that we were likely to see 3 or less interest rate cuts, if any.
Bloomberg reported on Saturday that there are now two new possibilities for the global inflation fight. First, the European Central Bank (ECB) may attempt something that diverges from the US. They are suggesting they will cut in June “even if the US holds fast”. “It’s time to diverge,” Bank of Greece Governor Yannis Stournaras said. “The situation in the euro area and the US are completely different.”
The other possibility? Brace yourself, said Bloomberg. If US inflation remains sticky, the Federal Reserve might do more than simply push back rate cuts. How about another rate hike? Bloomberg pointed out that robust consumption and investment as well as easing supply-chain problems, have fueled strong US growth despite higher interest rates.
Most of the investment banks have recently changed their tune. We provide below a comparison of what the big banks are saying about interest rate cuts in 2024:
"The March inflation report triggered a jailbreak by the sell-side bank and other Fed forecasters, who largely abandoned prior calls for a June cut. Most now see the first cut no sooner than Q3, and there's been a lot of movement towards expecting just one or two cuts this year."
Market Uncertainty Will Continue
There has been a sharp pickup in the volatility readings indicating that fear is slowly creeping back into the markets. Given that Wednesday and Friday were two very volatile down days, we would expect this.
This is also being promulgated by the heightened geopolitical risk in the Middle East as well as Russia’s war rhetoric regarding NATO countries is not helping. We can see that both inflation and geopolitical risks are taking hold in the metals markets as Gold and Silver and even Copper are making new daily highs. (for Gold it is new all-time highs, but if you factor in the declining value of the US $ along with inflation, we are not yet really at all-time highs). See volatility (VIX) chart below:
There are negative and positive signs on what the stock market may do in the near future. We present both the positive and negative points of view below.
You may recall several charts we have shown over the past 60 days that indicate what might occur as the stock market made numerous new all-time highs. Most of these charts have been positive and indicated that momentum would likely continue. You would have also read of the strong upward bias that has transpired historically when the markets have rallied 5 straight months. We also remind you that we are in an election year with an incumbent running for re-election and that typically helps support a bullish narrative.
We offer the following chart to show that April tends to be weak right before the 15th (tax date) and picks back up later in the month.
If the market plays out to script, according to the following analyst, we have only a possible small correction followed by new highs. (Note: one of our technical investment strategies that is run by two technical engines remains 100% invested in the market. This is a good sign. If you want more information on this investment model, please email Rob Quinn, our Chief Strategy Consultant).
Also, next week tends to be one of the strongest weeks of the year for the tech heavy NASDAQ 100 (QQQ) market. Not sure that this will play out in 2024 given higher interest rates and significant geopolitical risk, but anything is possible. See chart below:
Another chart showing a neutral to positive outlook for stocks is below showing weekly inflows to different asset classes. It appears that money continued to flow into higher risk-on asset classes. But, outflows from high yield bonds indicates “risk-off”. Yet bond funds have begun to pick up large inflows as institutions are rebalancing their portfolios and moving money to more conservative fixed income. See chart below:
Weekly ETF flows. "Over past week, global ETFs had largest inflows while agg bond funds came in second place ... much less interest in non-cyclical sectors (most outflows) and high yield."
On the negative side, several indicators (including a higher VIX) point to possibly more downside. Recall the chart earlier in this Outlook by Ryan Detrick, which suggests that good market years typically endure at least a 10% pullback like we experienced during 2023.
Here are a couple of charts that indicate there could be some market trouble ahead.
The first is just how little buying is going on from corporate insiders. This chart indicates that corporate insiders have slowed, if not stopped, purchasing company stock, most likely given their recent lofty levels. See chart below:
Large money managers are also rebalancing and rotating out of high momentum stocks (this includes higher yielding bonds).
A good example of this is Goldman Sachs Asset Management (GSAM) who recently told Bloomberg that they have been reallocating portfolios out of technology stocks and into the much more attractive energy sector. Here is what they recently shared with Bloomberg:
“We like taking profits on technology and moving toward other sectors,” Alexandra Wilson-Elizondo, co-chief investment officer of multi-asset solutions said in a phone interview.
The firm believes tech shares will come under pressure and prefers areas like energy and Japanese shares.
In the tech industry, “the risk-reward profile is skewed to the downside,” she added. “While we still believe in being long equities and having them in the portfolio, we think that there are some more attractive opportunities to access.”
Here are a few charts that illustrate technology stocks have recently “stalled”.
Our conclusion: Risk Management is more important than ever. Make sure you have your stops in place and have an “exit plan” for getting out should this pullback materialize into more of a correction. Additionally, sell calls on long-term holdings or buy puts and consider the use of inverse ETFs to hedge some of your portfolio exposure.
Energy stocks and Gold (and gold miners) have been the recent winners.
Both Mish (in her dailies) and me (in the weekly Market Outlooks) have been extolling the reasons to buy oil, gold and silver through ETFs - USO, GLD and SIL and the gold miners through GDX. All have put in multi-week highs and been among the best asset classes to own recently.
However, gold and energy stocks may be getting ahead of themselves. (you may recall a chart from two weeks ago indicating that when gold hits a new all-time high, 6 months later it has always been higher). See the two charts below indicating how stretched gold and energy stocks may be for the time being:
I now turn it over to Keith and his team that put together the BIG VIEW bullets. Make sure you watch this week’s video for an in-depth look at the market internals.
Thanks for reading.
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