Stocks rose in a straight line through the first three months of 2024, as the S&P 500 (^GSPC) posted its best first-quarter return in five years.
The situation has changed since April.
The S&P 500 index has fallen nearly 4% this month as expectations for Federal Reserve interest rate cuts continue to fade.
“We have said at the FOMC that we need greater confidence that inflation is on a sustained path toward 2% before policy easing is appropriate,” Fed Chairman Jerome Powell said on Tuesday. “Recent data clearly does not give us much confidence and instead indicates that achieving that confidence is likely to take longer than expected.”
The two-year U.S. Treasury yield soared after the comments, rising above 5% for the first time since November as stocks sank to trading lows.
“We expect an even more difficult path ahead compared to an unusually strong first quarter,” Trust co-chief investment officer Keith Lerner said in a note to clients late Monday. “I am doing so,” he said.
Lerner noted that the S&P 500 index's 4% annual decline is still a far cry from the average drawdown of 14% over the past 40 years. And in years like 2024, when the index rose 10% in the first quarter, the average maximum decline for the S&P 500 over the year was 11%, and the index never fell by at least 5%, Lerner said. pointed out. Only three times a year since 1980.
“Indeed, periodic declines are the price of admission to the market,” Lerner wrote. “And they always come with bad news.”
“We got here very quickly,” Jay Woods, chief global strategist at Freedom Capital Markets, told Yahoo Finance.
“I don’t think there’s going to be another catalyst for the market to go up other than personal profit pockets, and now that stocks are going up, [bond] Giving in again… an extended bull market in small caps and utilities, that story is over for now. ”
As Chairman Powell said earlier this month, the downward trajectory of inflation has proven to be “bumpy,” with the Consumer Price Index reporting for the third time in a row that prices have risen significantly above consensus expectations. There is.
Meanwhile, economic growth data continues to be released faster than expected, further heightening inflation concerns and contributing to a decline in market expectations for interest rate cuts this year.
Markets now expect two rate cuts this year, down from a peak of seven cuts in January, according to Bloomberg data.
Bond yields are soaring as Fed expectations are rewritten. The 10-year Treasury yield (^TNX) rose about 50 basis points in April to 4.67%, its highest level since November. And as we saw last year, rising bond yields can be a headwind for more risk-taking in the stock market.
”[The 10-year Treasury yield] Liz Young, SoFi's head of investment strategy, told Yahoo Finance: “We haven't seen any red flags yet that things are really in danger, but we do think there is a need for some degree of right valuation of the stock. I think so,” he said.
Still, some on Wall Street are calling a further decline in the market a “buyable decline.”
Strategists say that although inflation remains high, a change in the landscape where economic growth continues to accelerate could still help boost earnings and boost stock prices.
“Significant evidence in our survey still suggests we are in a bull market, but the price and time of this correction period is likely further down the road,” Lerner wrote.
“For investors who are on the sidelines or who are below their target stock allocation, we will use dollar-cost averaging and become more aggressive when deeper normal corrections occur. .”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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