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Markets will be looking for clues from the Fed ahead, as historic strong month unfolds


The stock market is heading towards what promises to be a volatile second quarter, but April has traditionally been the best month of the year for stocks.

The major indexes were all higher in March, but they had a weak performance in the first quarter, their worst since the pandemic. Investors were worried about rising interest rates, war in Ukraine and inflation, made even worse by disruptions to goods exports from both Russia and Ukraine.

Stocks are usually higher in April and this is the best month of the year for S&P 500. According to Sam Stovall, chief investment strategist at CFRA, the S&P is over 70% higher and has gained an average of 1.7% in all April since World War II, according to Sam Stovall, chief investment strategist. at CFRA. Over all months, the S&P posted an average gain of 0.7%.

The S&P 500 was up 3.6% in March and Stovall said the rally could continue. “I think we are going back to breakeven, but then I wouldn’t be surprised if we experience another pullback or correction before we have a year-end rally,” he said. .

Markets focused on next week will remain focused on developments surrounding the Ukraine war and the Federal Reserve. The Fed on Wednesday is expected to release minutes from March meeting where it raised interest rates for the first time since 2018.

There were also several Fed speakers, including Fed Governor Lael Brainard, who spoke on Tuesday.

Greg Faranello, AmeriVet Securities’ head of rates, said the Fed’s minutes could be the highlight of the week as the central bank is likely to provide more detail on its plans to shrink its balance sheet. me. The Fed has nearly $9 trillion in securities on its balance sheet, and reducing that holding would be another step toward tightening policy.

“The market is very curious. They’ll be looking for some clues about how fast, how big, what the lid looks like,” Faranello said.

The economic data calendar is light, with factory orders on Monday, international trade and ISM services on Tuesday and wholesale trade Friday.

Traders will also be watching for any comments from companies ahead of the first-quarter earnings season, which begins in mid-April.

“First quarter earnings have really improved over the last month, so that’s encouraging,” Stovall said.

Farewell to the first quarter

The Dow down 4.6% in the first quarter, while S&P 500 was reduced by 5%. The worst-performing stock so far is Nasdaq, down 9.1%. Over the past week, the stock has barely moved. The Dow fell 0.1%, while the S&P gained 0.1%. Nasdaq rose 0.7%.

Interest rates also changed significantly during the quarter, with the benchmark 10-year Treasury yield temporarily hit a high of 2.55% over the past week, after starting the quarter at 1.51%.

On Friday, the 10-year forward yielded 2.37%, while two-year yield, which mostly reflects Fed policy, at 2.45%. Two years interest rate 0.73% at the beginning of the year.

Faranello said bond yields could continue to move higher on inflation fears, but they could consolidate ahead of another big move.

“I think the market is looking for a new catalyst here,” he said. “I just think the first quarter was about re-pricing the market, and we’ve done that… The Fed has been very hawkish. We’ve done an impressive valuation. Now, we need to see more data to see how this develops in the second quarter.”

Stovall said the S&P 500’s first-quarter performance was among its 15 worst first quarters since 1945. After those weak quarters, which fell 3.8% or more, the second quarter averaged. better. The decline in the first quarter of this year is tied to 1994, which has 12order Worst first quarter ever.

After those weak first 15 quarters, “we actually grew 4.8% in the second quarter and raised prices two out of three times,” he said. But over the course of the year, the S&P 500 is up only 40% of the time and falls an average of 2% in those years.

But this year is midterm election year, and in those years, the second and third quarters are often the weakest. “Of those 15 worst quarters, five of them were midterms, and in those five quarters, Q2 was up 1% on average, and it only increased in price 40% in that time,” Stovall said. .

Stovall said the market could be higher in the second quarter, but it will face difficulties. “Oil prices are likely to remain bullish,” he said. “I see a 1% increase. We can create something good.”

Stockpiles were held hostage by rising oil prices and volatility in the first quarter, as the world scrambled to make up for barrels of Russian exports. Many customers have refused to buy Russian oil for fear of facing financial sanctions against the Russian financial system.

After wild swings both higher and lower, West Texas Intermediate Oil Futures rose 39% in the first quarter, the eighth positive quarter in a row and the best first quarter since 1999. WTI was just under $100 a barrel on Friday afternoon.

The market is volatile and complex

Joe Quinlan, CIO of Market Strategy at Merrill and Bank of America Privately, said he is building the market in the second quarter, but he sees some rough spots ahead.

“We have to deal with inflation and the Fed catches up with market expectations,” Quinlan said. “We have to keep inflation in check. It’s going to be a volatile, volatile year. We’re leaning more towards hard assets, whether that’s commodities, energy and natural gas.”

Quinlan said he leans more toward stocks than fixed income, which is also volatile. “We are using stocks as a hedge against inflation,” he said. “Within that framework are many hard assets, fuels, general agricultural complexes, and metals and minerals.”

In the second quarter, the stock market will continue to correct to a positive Federal Reserve amid what should have been a solid economy. With £431,000 added in MarchEmployment data continues to be strong, but there is a concern that the Fed will raise interest rates too quickly, derail the economy and drag it into a recession.

Futures market traders expect the Fed to increase its firepower at its next meeting in early May, raising interest rates by 50 basis points, or half a percentage point. The Fed’s first rate hike was a quarter point at its March meeting.

The market is pricing in the equivalent of an eight-quarter gain, and Treasury yields have moved higher at a staggering rate as market expectations for interest rates change. The two-year treasury yield overtake 10 year yield, or reversed last week, for the first time since 2019. That is seen by the market as Warning signs for a recession.

Fed officials have signaled that they want to cut the balance sheet soon. Kansas City Fed President Esther George last week said the Fed’s balance sheet would need to shrink significantly. She said the Fed’s Treasury holdings may have depressed 10-year yields, causing the yield curve to invert.

Faranello said interest rates could still move higher due to inflation concerns, but rates could consolidate after recent higher. The yield curve could also remain inverted.

“We could stay like this for a year and a half,” Faranello said. “Everybody’s been screaming that a recession is coming… I don’t think the yield curve is telling us a recession.” impending recession”.

Week-by-week calendar

Monday

10:00 am Factory order

Tuesday

8:30 a.m. International Trade

9:45 am Services PMI

10:00 am ISM Service

10:00 a.m. Fed Governor Lael Brainard and Minneapolis Fed President Neel Kashkari

2:00 p.m. New York Fed President John Williams

Wednesday

Income: Levi Strauss

9:30 a.m. Philadelphia Fed President Patrick Harker

2:00pm FOMC

Thursday

Income: WD-40, Brand Conagra, Constellation brand, Lamb Weston

9:00 am at St. Louis Fed President James Bullard

8:30 am. Initial request

2:00 p.m. Atlanta Fed President Raphael Bostic

2:00 p.m. Chicago Fed President Charles Evans

3:00pm Consumer Credit

4:05 p.m. at the New York Fed’s Williams

Friday

10:00 am Wholesale trade



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