S&P 500 Rally On Fed’s Influence, Analysts Warn of Pullback

The S&P 500 wrapped up its most impressive weekly performance of 2024, breaking a two-week losing streak in a remarkable fashion.

The resurgence in Wall Street’s momentum was fueled by the Federal Reserve’s reiterated pledge to implement three interest rate cuts throughout the year, which helped ease investor’s concerns.

Amidst lingering uncertainties, Fed Chair Jerome Powell’s calm response to recent inflationary pressures further bolstered market confidence.

Positive Momentum and Speculation

Despite a slight slowdown in the stock market rally on Friday, the overall trajectory for the week remained undeniably positive.

Speculation regarding potential interest rate cuts as early as June fueled this optimism, contributing to a week where the S&P 500 surged over 2%.

This sustained bullishness has prompted analysts to revise their projections, and sparked discussions about the likelihood of market consolidation or a near-term pullback.

David Lefkowitz from UBS Global Wealth Management highlighted that, given certain sentiment and positioning indicators are at elevated levels, a minor pullback in the coming months is plausible. Such a scenario could present an attractive opportunity for investors to bolster their equity holdings.

Fed’s Influence

As economic data remained sparse, market participants closely monitored statements from Federal Reserve officials.

Powell’s comments at a “Fed Listens” event made no explicit mention of monetary policy. Simultaneously, Michael Barr, the Fed’s vice chair for supervision, hinted at significant revisions to a proposal aimed at increasing capital requirements for lenders.

Market Performance

The S&P 500 closed just below 5,235 amid thin trading volumes, reflecting both resilience and underlying uncertainties in the current market landscape.

Closing Levels on FridayMarch 22nd, 2024: 

Index Last Change %Change
DOW JONES 39,475.90 -305.47 -0.77%
S&P 500 5,234.18 -7.35 -0.14%
NASDAQ 16,428.82 +26.98 +0.16%
U.S. 10Y 4.198%
VIX 13.06 +0.14 1.08%

Market Sentiment and Redemptions

As expected, the market ignored any negatives from Powell’s comments and focused on the positives, sending the S&P to another record high.

However, the recent rally was less forceful than the previous ones, indicating a potential pause or pullback.

U.S. equity funds suffered redemptions of about $22 billion in the week through Wednesday — the biggest since December 2022, as per to a note from Bank of America Corp., citing EPFR Global data.

This trend was also a sharp turnaround from the previous week when stocks had attracted record inflows.

Fed’s Interest Rate Projections

Federal Reserve Bank of Atlanta President Raphael Bostic now projects only one interest-rate cut this year, which he predicts will occur later than he initially expected.

Bostic had previously suggested that it would be appropriate for the Fed to lower rates twice in 2024, with the first of those cuts likely coming this summer.

Fed rate cycles since the 1970s has revealed that, in general, investors have more to fear from the first rate cut in a cycle than a pause, according to Ryan Grabinski at Strategas Securities.

On average, the S&P 500 is up more than 5% over 100 days between the last Fed tightening and the first rate cut. However, the trough in the broader market exceeds a 23% drop over 200 days after the first rate cut in a series.

This is something to consider before jumping on the bull run.

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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