Market Retreat On Rising Geopolitical Tensions And Bank Earnings

The stock market closed lower on Friday, capping off its worst week since October 2023. Disappointing earnings reports from major banks, including JPMorgan Chase, along with rising tensions in the Middle East, contributed to the sell-off.

Record Decline and Market Volatility

The S&P 500 saw its biggest drop of the year following reports of Iran preparing to attack Israel. This news led to increased market volatility, with the Volatility Index (VIX) spiking to levels not seen since October.

Currency and Commodity Movements 

The U.S. Dollar recorded its best week since 2022, while oil prices surged above $90 per barrel. Gold prices also saw gains before retracing.

Weekly Market Performance

The S&P 500 fell by 1.5%, the Dow Jones Industrial Average dropped by 1.2%, and the Nasdaq Composite lost 1.6%. This downturn follows a week in which the S&P 500 reached an all-time high, only to retreat later.

For the week, the S&P fell by 1.56%, the Nasdaq dropped by 0.58% while the Dow lost 2.37%.

Closing Levels on Friday, April 12th, 2024:   

Index Last Change %Change
DOW JONES 37,983.24 -475.84 -1.24%
S&P 500 5,123.41 -75.65 -1.46%
NASDAQ 16,175.09 -267.11 -1.62%
U.S. 10Y 4.554%
VIX 17.31 +2.40 16.1%

Analysis of Recent Market Behaviour 

As predicted, this week was marked by significant volatility in both the stock and bond markets.

The last three days, in particular, were marked by confusing price movements. Initially, a sharp sell-off was triggered by a stronger-than-expected Consumer Price Index (CPI), followed by a robust rally that not only recovered the previous losses but exceeded them, driven by a weaker-than-expected Producer Price Index (PPI). Apple and Amazon were significant contributors to this rally, with Amazon reaching new highs.

Geopolitical Tensions and Market Reactions 

On Friday, we witnessed a complete reversal, surrendering all those gains amid escalating geopolitical tensions. The day’s trading clearly demonstrated a flight to safety, with notable rallies in Gold, Bonds, and the U.S. Dollar.

One might wonder why the market is reacting now, given that geopolitical risks, especially in the Middle East, have been a long-standing concern.

Recent news of potential concerted attacks on Israel by Iran has brought these issues to the forefront again. Historically, we’ve seen moments where the market seemed to shrug off similar non-U.S. news due to FOMO (Fear of Missing Out).

However, analysts are now suggesting that the market is ready for a correction, and the latest developments have provided a clear impetus for this pullback.

Market Outlook and Strategy

The critical question remains: will this downturn persist? The S&P 500 is currently just above its 50-day moving average; a dip below this level could prompt a broader sell-off. However, it’s important to remember that market dips like this are not uncommon, and traditionally, the strategy has been to buy on these dips.

Therefore, while the situation may seem tense, I advise against excessive worry unless we see a breakdown through more significant technical support levels. With the VIX remaining high, my message mirrors last week’s: brace for continued volatility.

Source: CBOE, Bloomberg

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years. 

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