Markets have been very volatile lately.

What’s going on?

Let’s take a quick look at the factors that are influencing markets right now.

1. The bull market narrative has shifted

For months, investors have told a “Goldilocks” story of a strong economy, tamed inflation, and interest rates that were soon to drop.

However, stronger-than-expected economic data and sticky inflation have now complicated the story, and investors have become wary.¹

There are still plenty of reasons to be optimistic, but investors are being careful and taking in earnings data to gauge the upside potential of the next weeks and months.

2. Interest rates are likely to stay higher longer than we expected (or wanted)

A strong economy and hot inflation mean the Fed is now getting cold feet about cutting interest rates.²

Recent comments by Fed chair Jerome Powell suggest the Fed will keep rates high until economists are confident inflation is fully in reverse.

Some analysts are even pricing in the odds of another rate hike if inflation continues to remain high.³

Since investors have been banking on rate cuts coming soon, the new “higher for longer” reality is causing them to reevaluate their positions, further stoking volatility.

3. Geopolitical flare-ups are causing tensions to rise

With Israel and Iran trading attacks and a spring offensive gearing up in Ukraine, there are plenty of geopolitical worries, sadly.

Some good news (if there is any good news when so many lives are at stake) is that geopolitical shocks typically only have a temporary impact on markets.⁴

We don’t know what lies ahead, but we hope and pray for a peaceful end to the violence.

Volatility is normal after a prolonged rally

Here’s the bottom line: volatility after a strong rally is very common.

Especially at the beginning of a new quarter when investors are digesting earnings reports from the previous quarter and reassessing company performance.

Our crystal ball is in the shop, so we can’t tell you with certainty what happens next.

However, given that the U.S. economy remains healthy, with a strong jobs market and robust consumer spending, we don’t see a major risk of a correction turning into a serious downturn.⁵

Have questions? Want to talk through some concerns?   Please don’t hesitate to reach out.

Sources:

1. https://www.fanniemae.com/newsroom/fannie-mae-news/hot-economy-inflation-likely-keep-rates-higher-longer

2. https://apnews.com/article/inflation-interest-rates-federal-reserve-powell-cuts-c60436c5e719ce95fc487fdb98395d09

3. https://www.ft.com/content/8c5da64b-766e-4993-86f5-aac95342432a

4. https://www.morningstar.com/news/marketwatch/20240422136/history-says-stock-market-dips-caused-by-geopolitical-turmoil-should-be-bought-not-sold

5. https://www.usnews.com/news/economy/articles/2024-04-22/gdp-inflation-highlight-week-of-economic-data

The stock market rocketed to new record highs after the latest Federal Reserve meeting.¹

Will markets continue to rise?

Will stocks take a dive after the recent record highs?

What could the Baltimore bridge collapse mean for the economy?

Let’s discuss.

Why are stocks on such a tear?

Despite some bumps in the road, markets have been on an extended rally that has gone on for months, notching new record highs along the way.¹

Two major factors are fueling the gains:

1. The expectation of interest rate cuts (soon)

2. Enthusiasm for tech and AI stocks

The latest Fed meeting ended with investors concluding that policymakers are serious about cutting interest rates this summer (as long as inflation data continues to trend downward).²

The Fed’s official position is that it expects to cut rates at least once this year (some Fed officials want to cut rates two or even three times).³

Investors expect lower rates to bolster the economy by making it cheaper and easier for consumers and businesses to spend, build, and grow.

Will stocks continue to rally?

Many analysts think there’s still plenty of room for stock prices to rise this year because they believe the rally is fueled by expectations of healthy economic growth.

The chart below shows some analysts’ 2024 year-end forecasts for the S&P 500 index.⁴

While you can see a few analysts are less bullish than the others, many are predicting a strong year for stocks.

Will they prove correct? Our crystal ball is in the shop so we’ll have to wait and see.

Is a correction coming?

Corrections are always possible, especially after markets reach new highs.

Much of the current rally’s steam comes from expecting interest rates to fall soon.

We should expect a pullback if inflation data comes in hotter than expected or traders think the Fed might be getting cold feet.

Technology stocks (another pillar of the rally) are also typically interest-rate sensitive since many tech companies rely on debt to fund operations (and may not produce immediate profits).⁵

Could the Baltimore bridge collapse impact the economy?

It’s not yet clear the extent to which the sudden bridge collapse and port shutdown could impact supply chains or inflation.

It’s also hard to fully reckon the human tragedy of lives lost when the bridge fell, and lives disrupted by the aftermath.

The Port of Baltimore is one of the busiest ports on the East Coast, and is a major hub for coal, sugar, and vehicles.⁶

The port’s closure may impact global coal prices as well as supply chains for cars, trucks, and other goods.

We’ll know more in the weeks and months to come.

Bottom line: The rally is looking healthy and could continue, but we expect pullbacks as investors take profits and digest new data.

As always, we’re watching and preparing for the different scenarios that could play out this year.

Sources:

1. https://www.cnbc.com/2024/03/24/stock-market-today-live-updates.html

2. https://www.cnbc.com/2024/03/20/fed-meeting-today-live-updates-on-march-fed-rate-decision.html

3. https://www.cnn.com/2024/03/26/economy/fed-officials-fewer-rate-cuts-this-year/index.html

4. https://finance.yahoo.com/news/wall-streets-most-bullish-strategist-cites-a-big-surprise-pushing-stocks-higher-morning-brief-100051265.html

5. https://www.nasdaq.com/articles/can-big-tech-stocks-thrive-in-a-higher-interest-rate-environment

6. https://www.wsj.com/finance/baltimore-bridge-economic-impact-0514d05a

Chart sources:

1. https://finance.yahoo.com/news/wall-streets-most-bullish-strategist-cites-a-big-surprise-pushing-stocks-higher-morning-brief-100051265.html

2. https://www.wsj.com/finance/baltimore-bridge-economic-impact-0514d05a, https://www.eia.gov/coal/production/quarterly/pdf/t13p01p1.pdf

It’s official. The bear market is behind us.

The S&P 500 finally hit a new record for the first time since 2022. And then notched multiple higher highs in the days that followed.¹

That means it has passed the final bar to formalize the bull market in stocks that started after the October 2022 market low.²

What’s a bull market? 

Though there’s no official designation, “bull market” is a handy nickname for a period of generally rising markets.

Bull markets get called when a) markets rise at least 20% above the most recent market bottom and b) reach and surpass the previous market high.

It can get a bit confusing since sometimes we’re in a bull market but don’t “officially” call it until later.

Let’s take a moment to celebrate a milestone.

(I’ll wait.)

Does this mean all stocks are rising?

No. An index like the S&P 500 represents a portion of the market and is useful for tracking trends over time.

The performance of individual stocks is affected by the earnings and expectations of the underlying companies and other factors that may not apply to the overall market.

So, what happens next?

If we look at the history of bull markets, we can expect markets to continue to rise.

The last two bull markets (from 2009-2020 and 2020-2022) lasted 132 months and 21 months, respectively.³

On the other hand, there are reasons to be cautious.

For one, the past doesn’t predict the future.

Pullbacks happen regularly and it’s common to see a drop after pushing new highs as investors take profits.

And we know investor optimism can flip to negativity quickly when fresh headlines arrive.

The year has kicked off with lingering uncertainties about inflation, interest rates, and the economy that could drag on market performance.⁴

Here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance. 

(Take a look at the red circles to see the market drops each year.)

The big takeaway? In 16 of the last 24 years, markets have dropped at least 10%.⁵

Even in years with powerful performance, markets typically experience a pullback or two.

For right now, we have some excellent economic news to celebrate.

The economy grew much faster than expected at the end of 2023.

The U.S. economy grew 3.3% (annualized) in the fourth quarter—much higher than the 2% expected—though still slowing from 4.9% growth in Q3.⁶

Consumer spending was strong, indicating Americans are feeling optimistic enough to keep shopping.

There’s also encouraging data on inflation.

The Personal Consumption Expenditures (PCE) index shows inflation rose just 2.7% in 2023 overall, down from 5.9% a year ago. That’s a significant decrease in overall inflation.⁶

Taken together, that means the economy is still growing while inflation continues to moderate, which is exactly what economists hoped would happen.

Bottom line: we’re seeing positive developments but remaining cautious. We’re keeping an eye on markets and will be in touch with updates as needed.

Sources:

1. https://www.reuters.com/markets/us/futures-stall-ahead-economic-data-tesla-slides-growth-warning-2024-01-25/

2. https://www.nytimes.com/2024/01/19/business/stocks-bull-market.html

3. https://www.forbes.com/advisor/investing/bull-market-history/

4. https://www.morganstanley.com/ideas/are-we-in-a-bull-market-2024

5. https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf

6. https://www.cnbc.com/2024/01/24/stock-market-today-live-updates.html

Chart source: https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf

What’s going on with markets?

Why does the federal government keep getting into fiscal fights?

A lot is going on, so let’s discuss.

Why did markets melt down?

A combination of things.

Some negative news about home sales and consumer confidence created fresh concerns about the state of the economy. [1]

The reality of what high interest rates (that may go even higher this year) could mean for corporate profits is also setting in.

Companies that have to refinance corporate debt at higher rates could see much higher interest payments, cutting into their performance.

And on top of all that is the latest round of fiscal drama in Washington.

All that uncertainty pushed markets into fear and selling mode.

What are markets going to do next?

That’s hard to say.

Markets often bounce after a selloff as traders buy the dip.

We’re kicking off a new quarter and positive news could cause stocks to rally.

However, bearish selling pressure could continue as investors recalibrate their expectations about how long higher interest rates could linger.

So, what’s behind the ongoing budgetary drama in Washington?

Phew. It’s complicated.

Many economists and politicians agree that federal spending needs to be reined in.

The problem is that no one agrees on when and where to cut.

The U.S. has a pretty big deficit issue.

The Congressional Budget Office (CBO) projects that the federal deficit will rise to nearly $3 trillion per year in the 2030s, up from about $1.4 trillion in 2022. [2]

That large gap will continually add to the overall national debt (and interest payments) until it’s addressed.

Critical deadlines like the passage of spending bills (or raising the debt ceiling) offer an opportunity for politicians to force a standoff.

If federal spending needs to be cut, are budget showdowns actually that bad?

Fiscal crises aren’t good for the economy or markets.

Government shutdowns are disruptive as offices close down, troops and workers go without pay, and regular government processes stop.

Debt ceiling standoffs risk defaulting on sovereign debt, which would spill over into global financial markets.

The CBO estimated that the 2018-2019 shutdown cost the economy $11 billion, $3 billion of which was never regained by future spending. [3]

Even near-misses can be costly as they inject uncertainty and distrust about government processes.

In its August downgrade of U.S. credit, Fitch Ratings emphasized its concern about how political polarization affects regular government processes in Washington. [4]

Here’s the bottom line: the long-term effects of the latest crisis are likely to be muted.

There are a lot of factors (positive and negative) driving markets and this is just one of them.

However, we’re likely to see a lot of volatility ahead as investors digest economic data and judge recession risks.

Sources:

1. https://www.cnbc.com/2023/09/25/stock-market-today-live-updates.html

2. https://www.cbo.gov/publication/58946#_idTextAnchor004

3. https://www.reuters.com/world/us/shutdown-default-washingtons-risky-new-debt-ceiling-standoff-2023-01-24/

4. https://www.cnn.com/2023/09/25/economy/moodys-us-government-shutdown-credit-rating/index.html

Chart sources: https://www.cbo.gov/publication/58888