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Consolidation or Correction? Earnings and liquidity will tell — Week of April 15, 2024

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Still no need for rate cuts

indexwtdytd1-year3-year5-yearindex level
S&P 500 Index-1.527.8625.499.0213.855,123.41
Dow Jones Industrial Average-2.361.3213.996.239.8537,983.24
Russell 2000 Small Cap-2.91-0.8013.19-2.196.192,003.17
NASDAQ Composite-0.457.9734.065.8016.1716,175.09
MSCI Europe, Australasia & Far East-0.803.6910.573.786.982,297.57
MSCI Emerging Markets0.923.658.98-4.542.201,055.09
Barclays U.S. Aggregate Bond Index-0.97-2.78-0.82-3.350.042,101.84
Merrill Lynch Intermediate Municipal-0.22-1.130.64-0.641.45311.32

As of market close April 12, 2024. Returns in percent.

Investment Insights

 — Steve Orr 

Tax time

A fair number of investors feel a bit poorer today as tax payments flow to D.C. Likely too are some fast money traders who were riding the momentum run of the past 24 weeks. As of Friday’s close, the Dow Industrials and S&P 500 suffered their first back-to-back negative weeks since October. We have argued in these columns for a month that a pullback or correction was needed to rebuild energy. Well, we have one now.

External events usually unsettle markets for a short period but rarely change the long-term trend. Friday’s news that Iran would have its proxies in the region strike Israel in the near future put traders on alert. Geopolitical news is a convenient scapegoat and played a role in market action late last week. Iran’s “designed to fail” measured response over the weekend helped traders turn their attention back to the Red Sea and tight oil inventories.

For the first time in months, stocks and bonds saw flight to safety trades. Risk off was the order of the day for stocks, with more than 480 S&P 500 names moving lower. More than 100 members fell below their 200-day moving average, pulling the percent of members above that metric from 80% early last week to a neutral 68%. One encouraging note is that pauses starting when 80% or more of the index members are trading above their 200-day average tend to have higher returns six and 12 months later. Primary drivers for stocks and rates over the past week continue to be the inflation and deficit stories.

Only up

The past three months’ inflation reports have not been to anyone’s liking. The headline consumer price index has hovered between 3.1% and 3.5%. Consider that the average for 2021 was 7%, 2022 was 6.5% and 2023’s fell to 3.4%. Swinging between 3.1% and 3.5% does not seem so bad compared to the past few years. Those are official numbers, and day-to-day we see inflation in food, rent and gasoline that looks and feels higher. The U.S. Energy Information website shows Texas gasoline prices 33% higher than the beginning of 2020, and that is using a March month-end price of $3.068 per gallon. I paid $3.37 Friday morning.

The “core” CPI, which strips out food and energy, rose at a 3.8% year-over-year rate in March. The services group rose at a 7% clip over the past three months. Think insurance and healthcare, for example. I know “intellectually” home insurance is going through some “one-time” adjustments, but reports of 50% and 60% year-over-year jumps make us wonder about next year.

Core and PCE inflation measures are watched closely by the Fed because of their belief that they influence wage inflation. The interesting counterpoint to the Fed’s thinking is that wage inflation has been trending down. Several Eurozone countries report inflation numbers this week. Of the major countries that have reported inflation thus far, only the U.S. CPI reading is higher. We expect CPI readings to moderate in the next couple of months but be back to the mid- and high 3% range by the election. 

Ok, next

Monday morning brought risk on back into view. Two weeks of consolidation has pushed the market’s trend back to neutral and washed out some frothy enthusiasm. Stock markets usually show some strength the first week after Tax Day. The rest of the month into June is usually a weaker period for stock performance. The past four election years this period has seen stock indices slide by 9% or more.

Valuations remain elevated. Strong earnings reports can lessen the blow and length of time of a correction. Sentiment still favors the Bulls but less than it did a month ago. Overriding all of the usual Wall of Worry is market liquidity. The Treasury may pull more than $380 billion from bank accounts this week. The Fed’s reverse repo facility should continue to fall as money market funds either pay out funds to shareholders for their taxes or buy Treasury Bills north of 5% yields.

We expect Yellen to have a “full war chest” of government cash to redistribute this summer. At the same time the Treasury is pushing money into the financial system (think paying contractors and defense), the Fed will be lowering its QT program. In other words, the Fed will be buying more Treasury debt from the Treasury, creating dollars that go into the Treasury General Account. Buying more bonds also keeps rates lower, helping the administration’s budget. Summary: After a brief drop in market liquidity this month, markets will have fuel for a continued rally. 

Wrap-Up

Powell keeps talking about cutting rates. An economy lumbering along in second gear with persistent 3% to 4% inflation does not need rate cuts when there is so much money sloshing around the system. Need confirmation? Look to gold and copper prices rising at the same time.

Markets are coming around to some new beliefs: War, commodity scarcity and higher rates are here to stay, thanks to elevated government spending and inflation. 


Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here

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