What Happened: Fed Chairman Powell pivots after pivoting

 

What Does it Mean? 

In October of last year, Chairman Powell shocked investors and markets citing the FOMCs intention of cutting rates three times in 2024. For a total of 75 basis points or ¾ of 1%, the bond market immediately priced in these cuts and sent stocks on an historic run into year end and through January of 2024. This pivot relaxed the concern of the current interest rate policy and was due in part to the significant decline of inflationary pressure. This week, however, Powell walked back those comments citing concern over the sticky and continued inflation, suggesting that cuts may be delayed this year. Interest rates rose, bonds & stocks fell for the week.

 

Why Do We Care?

While we never know what the catalyst will be, markets tend to move in a stair step motion. Since the October low of around 28,700 in the Dow, the advance towards 39,800 was fast and strong with little pause along the way. It makes sense, in our opinion, that we would at minimum see a pause and or selling that may digest these moves and set the stage for the next potential leg higher. The catalyst, in our opinion, for the recent market weakness has been inflationary pressure and interest rate increases, to which stocks have historically not reacted favorably. All the while, we continue to see declining economic data such as housing starts or layoffs, which we believe will impact the inflationary data in the near future. It is for this reason we find it hard to become too bearish or concerned with this pullback but rather see it as an opportunity for those who have been sidelined during the latest advance.

 

 

What Happened: Israel retaliates after Iranian missile and drone attack

 

What Does it Mean?

Geopolitical risks are on the rise with tensions ever increasing between Israel and Iran. As a significant US ally, the natural thought progression for us is how this may impact the US involvement in this altercation.  Since the Red Sea attacks by the Iranian backed Houthis, it seems as if Iran is working hard to draw the US into foreign conflict. Markets do not like uncertainty and the risk of this escalating, in our opinion, looks to be of increased possibility.

 

Why Do We Care? 

While sad to say, history tells us that US markets often perform well during times of international and geopolitical tension. In fact, a study was conducted of stocks dating back to 1940 citing that ‘stocks rose an average of 9.2% in the subsequent 12 months’ after a sharp sell-off the day the crisis or event occurred. This assumes the crisis does not coincide with a recession.

In our opinion, this is due in part to both the inclusion of defense companies within the broad market indices, as well as increased government spending. It is too early to tell if this event will transpire as others have in the past, but we will continue to let the data inform our decisions and not fear or emotion.

We weren’t sure what would create the pullback but it is something we’ve been looking for now for some time. Now that it has arrived, we will be looking for areas of opportunity rather than points of exit.

 

Upcoming Webinar: This coming Wednesday, April 24th, we’ll be talking about these events and others as we head into the 2024 Presidential election. You won’t want to miss this Webinar. Held at 7pm Eastern, you can join from the comfort of your home or wherever you may be. REGISTER HERE and we look forward to seeing you then.

 

REGISTER FOR THE WEBINAR HERE

 

Until next time

~ Quint

 

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