Stocks staged a strong rebound in March, and the April Market Expectations Table again reflects that, despite a lack of actual fundamental progress, stocks are pricing in positive resolutions across many current market influences—and that leaves this market vulnerable to a disappointment once again.
Looking at the Market Expectations Table, the one notable change is that we added another market influence: Economic Growth. Some important data points in March implied the economy might be close to losing positive momentum, and given high inflation and the Fed’s aggressive hawkish-ness, any hints of an economic slowdown will hit markets. More directly, given some possible signs of slowing growth, markets will be very sensitive to any signs of stagflation going forward. The remaining influences on the MMT were unchanged from March, and there wasn’t a lot of improvement in the actual fundamentals despite the solid quarter-end rally.
Markets have enjoyed a solid rally over the past month, but that wasn’t really driven by fundamentals as there hasn’t been much improvement in the major market influences. To that point, none of the major market influences (Russia/Ukraine war, oil prices, Fed tightening, inflation or growth) saw material improvement, and all of them, with the exception of Fed tightening, are essentially the same as they were in March. In the case of Fed tightening, that actually got a bit worse over the past month as the Fed is telegraphing a 50-bps hike in May.
Now, it’s also true that in March we didn’t see these market influences get materially worse—and that, combined with very negative sentiment and an oversold market, is what drove the re-bound last month. But with the S&P 500 not above 4,500, there’s very little room for disappointment, and going forward, “Not as bad as feared” is not going to produce a sustainable rally.
Things Get Better If:
There is a ceasefire between Russia/Ukraine
Oil sustainably drops below $100/bbl
The Fed hints it won’t hike more than 250 basis points in 2022
Inflation peaks and growth remains strong.
There’s still room for upside in this market if we get actual, positive improvement across the cur-rent market influences. But barring major improvement across all these influences, we still don’t see anything that can send the S&P 500 sustainably above 4,600. If we get a ceasefire in Ukraine and oil drops, and the Fed promises a gradual balance sheet runoff (less than $200 bln/month) then the S&P 500 can break through 4,600 and likely move towards 4,700, although again we’d be skeptical of that being sustainable over the medium term given looming economic headwinds and rising rates.
Things Get Worse If:
The Russia/Ukraine war drags on or extends beyond Ukraine
Oil stays near $120/bbl or goes higher
The Fed hints QT will be faster than expected or we get even more rate hikes
Inflation does not peak and economic data misses estimates.
Stocks are vulnerable to disappointment once again given the recent rally, so any deterioration in the Russia/Ukraine situation, spike in oil, and hints of stagflation (high inflation/lagging growth) will hit stocks, and a 10% air pocket shouldn’t shock any-one. More broadly, if we see signs that earnings are peaking, growth is peaking, and the Russia/Ukraine conflict is essentially turning into a long, drawn-out conflict, then the S&P 500 is currently well above levels that we would consider “fair value,” and again given fundamentals we should not be surprised by more volatility.
The April Market Expectations Table reflects this simple reality: The March rally in the S&P 500 wasn’t driven by real, fundamental improvement. Instead, it was mostly driven by 1) Very bearish sentiment and 2) An oversold market buying on the reality that it could have been worse.
However, with the S&P 500 now just under 4,600, “it could have been worse” won’t provide sustainable up-side we’ll need to see real, tangible progress across the major market influences for the S&P 500 to move higher. Conversely, stocks are now “over their skis” from a fundamental standpoint, and if we see real deterioration in the fundamentals, then a 5%-10% pullback shouldn’t shock anyone.
And remember – the one fact pertaining to all conditions is that they will change.
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President