Deciphering Wall Street’s Mood Swings
Manic depression is searching my soul
I know what I want but I just don’t know how to, go about getting it
Feeling, sweet feeling, drops from my fingers, fingers
Manic depression has a-captured my soul, yeah…
Those classic lyrics sung by Jimi Hendrix describe the current mood on Wall Street. The stock market in recent days has been experiencing euphoric rallies on strong corporate earnings, followed by melancholic retreats plagued by inflation fears.
Let’s make sense of the market’s mood swings and volatility, with advice on how to trade now.
Indicators year to date have portrayed a persistently “sticky” inflationary trend, prompting investors to fret anew over Federal Reserve actions.
Meeting Wall Street’s expectations, the Fed maintained interest rates last week, signaling a cautious approach to policy adjustments amid lingering economic uncertainties.
The Federal Open Market Committee (FOMC) stood pat last Wednesday and left the policy rate in the 5.25% to 5.50% range, a 22-year high. In the wake of the FOMC’s monetary policy decision, stocks embarked on a roller coaster before closing out the week with gains (see chart).
Forecasts now lean towards a delayed rate cut, undermining earlier more dovish projections. You can forget about an interest rate cut in June. We’ll get a cut in September at the earliest…maybe. The permabears are ruling out a cut this year altogether, although I think that’s too pessimistic.
Regardless, CNN’s “Fear and Greed Index” currently hovers at 39, a reading that indicates pervasive fear is driving the U.S. markets.
The labor market has emerged as both protagonist and antagonist in recent market narratives. Initial concerns over inflation were fueled by early-week labor cost data, offset by a tempered end-of-week jobs report. While employment conditions remain robust, the market’s jittery reaction underscores the delicate balance between economic health and inflationary pressures.
Corporate earnings have emerged as a beacon of optimism. Overall, 80% of the companies in the S&P 500 have reported actual results for the first quarter of 2024, according to research firm FactSet. Among these companies, 77% have reported actual earnings above estimates, which is equal to the five-year average of 77% and above the 10-year average of 74%.
As you can see from the above earnings chart, sectors beyond technology are exhibiting strong earnings growth (e.g., communication services and utilities), indicating a broadening support for market performance.
Stock market resilience despite Fed policy shifts underscores the significance of earnings growth in shaping investor sentiment.
Amid the market’s cautious outlook on Fed policy and favorable view of earnings growth, you should adopt a diversified portfolio approach that mixes growth with defensive sectors.
That said, the main U.S. stock market indices closed higher Monday, as follows:
- DJIA: +0.46%
- S&P 500: +1.03%
- NASDAQ: +1.19%
- Russell 2000: +1.23%
Dovish comments from various Fed officials on Monday put investors into a bullish mood…for now.
The week ahead…
The following key economic reports scheduled for release in the coming days have the power to move markets, so keep an eye on them:
Consumer credit (Tuesday); wholesale inventories (Wednesday); initial jobless claims (Thursday): and consumer sentiment (Friday).
Throughout the week, various Fed officials will give public speeches. Their every word, whether uttered in public events, speeches, or press conferences, has the potential to send shockwaves through financial markets.
The mere hint of hawkishness, signaling a readiness to tighten monetary policy to curb inflationary pressures, can trigger selloffs. Stay vigilant and in control of your emotions.
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John Persinos is the editorial director of Investing Daily.
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