We have not experienced this kind of price action in the US stock market since 2022. From the high in February, the S&P 500 has fallen over 10% but we did see the selling abate into the end of the week and on Friday there was a sharp rebound which could mark a bottom.
As you can see on the graphic to the right, the S&P fell 2.5% on Monday but fewer and fewer stocks were participating in the decline. This was a clue that downside was becoming limited as the market was looking for a support level. Underneath the hood, the MAG 7 technology stocks were mostly the culprit.
The S&P 500 Chart
If we look at the chart below of the S&P 500 ETF (SPY), you can see we flirted with a support level for most of the week (61.8% FIB). The low on Thursday tagged this support level of $550 and then buyers came in on Friday.
This is only one day of rally but the price action was impulsive in all of the major indices which is another good sign for continued advance next week. One notable on the technicals in the chart: the RSI (Relative Strength Index) at the bottom is the most oversold since last August where we started the last rally so odds that is another good sign for higher prices next week.
Fed Meeting On Deck
We have another Fed meeting on Wednesday and the market is not expecting any change to interest rates. However, the Fed will release their dot-plot where each governor provides their forward projection on rate policy. The interesting part of this chart is seeing if the committee is at a consensus and how wide of a dispersion there is among its members.
One thing the markets will be looking for is the Fed’s opinion on inflation and this week we got a better expected read on the CPI (2.8% vs 3.0% last month) and the PPI (3.2% vs 3.5% last month). This was the first slowdown in four months. Economists noted that while this week’s reports offer some relief, the Federal Reserve is likely to remain cautious.
There is also a lot of talk about tariffs and how they impact prices for goods and services. You can see from the graphic above that the Trump tariffs from the first administration did not have a discernible impact on the big picture. The current round of tariffs are more widespread and it is too early to know the exact trade terms so the markets will have to live with the trade uncertainty for the foreseeable future. Ultimately, a balance in trade terms will be achieved once the politicians put their egos in their back pocket and get on with business. FYI, the rise in the CPI on the right side of the chart was caused by federal deficits and massive quantitative easing by the Fed.
The tariff uncertainty has weighed on Americans as you can see that consumer sentiment on the right has dropped over the last several weeks. The thought of higher prices is depressing and stocks falling this past month didn’t help.
On a positive note, wage growth is pretty good as the Atlanta Fed released its February wage growth tracker this week and that showed a rise (YOY) of 4.3% vs 4.1% in January. For people that switched jobs, wages were higher by 4.8% in a sign that the labor markets remain healthy.
Reviewing 10Yr Treasury Yields
Below is an updated chart of 10Yr Treasury yields and you can see that as stocks plummeted so did yields. The 10Yr has dropped from 4.81% (Jan 15th) to as low as 4.11% (March 4th). In the big picture, the historical average for 10Yrs is around 5.5% and I think we will eventually get back to that level.
If we see a recovery in stocks and good economic data in the coming weeks then we should see this tenor headed closer to 5%. I have alternate scenarios not in this chart but that is my base case for now.
Thank you for being a subscriber!
Paul J McCarthy III CFA
President, Kisco Capital
