Gut check, but primary uptrend intact

Market Perspectives

February 13, 2024

What Happened

A broad market selloff was seen on Tuesday following a hotter-than-anticipated inflation report. The headline consumer price index came in at 3.1%, above the 2.9% consensus forecast, while core inflation rose 3.9% versus Street expectations of 3.7%. Consequently, the 10-year U.S. Treasury yield popped above 4.30%, the highest level since early December. The S&P 500 fell 1.4% while small caps, highly interest rate sensitive parts of the market, such as REITs, and more speculative areas were down more.

Our take

After a V-shaped recovery since the October lows, where the S&P 500 gained more than 20% and the technology sector rose more than 30%, investor sentiment had become stretched. The market was vulnerable to bad news, and we received that in the inflation print. 

Indeed, the tension we discussed recently between a stronger economy, inflation, and Federal Reserve (Fed) policy is set to continue and add to market volatility in both equities and fixed income. A solid economy should continue to support earnings growth, but higher rates will likely also serve to cap valuation expansion. And this inflation report, alongside the stronger economy, complicates the Fed’s path forward.

Still, despite the ugly day, the weight of the evidence in our work suggests the market’s primary trend remains positive, even while we anticipate a cooling off and choppy near-term period.

For perspective, the S&P 500 just went up 14 out of the past 15 weeks – such a streak was last seen in 1972.  Moreover, on a technical basis, after reaching an all-time high after not doing so for more than a year, as stocks did recently, the S&P 500 has been higher 14 out of 15 times a year later. This is consistent with the strong momentum signal we saw in December, which also tends to be a positive sign when looking out six to 12 months. 

Although the inflation report may push out the Fed’s first rate cut, we would trade a more resilient economy with fewer rate cuts for a weaker economy with more aggressive rate cuts. This is also the lesson from market history – in 2001 and 2008, aggressive rate cuts did not help the stock market or help us avoid a recession.

The strong economy and even a bit higher inflation should continue to support corporate profits. Just this past week, S&P 500 forward earnings estimates reached another record high.

From a technical perspective, we see a band of price support from the rising 50-day moving average (4788), then at the 4700 level, and more important structural support around 4600 (the former breakout point).

Bottom line

Markets are seeing a modest gut check after a very persistent period of strength. The tension between a stronger economy, inflation, and Fed policy is likely to continue to result in increased swings. That said, our work suggests the primary market trend remains positive and has earned the benefit of the doubt. 

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