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Stocks had one of the worst days of 2024 on Tuesday as a hotter-than-expected inflation report spooked investors.
But with stocks at record highs, many Wall Street strategists said there were signs of economic recovery. The Dow Jones Industrial Average (^DJI) fell more than 500 points on the day, and the S&P 500 (^GSPC) fell about 1.4%. And perhaps Tuesday’s pullback was just a matter of time, given the recent record highs seen across the market.
Michael Antonelli, a market strategist at Baird, told Yahoo Finance that the market has essentially been “up nicely since January,” and that some sort of pullback from that level is typical. did.
“Frankly, this isn’t all that surprising to me,” Antonelli said. “I think the size of today’s move was eye-opening. It shows people were ready to hit the sell button.”
But importantly, investors were also prepared to buy on the spurts, and the inflation surprise didn’t send stocks off a cliff. The S&P 500 has avoided a 2% daily drawdown since February 2023. The Russell 2000 (^RUT) never fell sustainably below its 50-day moving average, a key technical factor that reflects market resilience. Jay Woods, chief global strategist at CMT, said:
The market’s move is consistent with the lesson Fundstrat head of research Tom Lee shared with clients after Tuesday’s selloff. Mr Lee said it was “still too early” to call the market an all-time high in the first quarter of 2024. He added that Tuesday’s market decline was “like profit-taking as prices regain last quarter’s gains.” [the] For the past 4 days. ”
Notably, one Fed official downplayed Tuesday’s inflation numbers, emphasizing that a single printout won’t change the underlying trends seen in the inflation numbers.
“Let’s not get excited if the CPI for the month is higher than expected,” Chicago Fed President Austan Goolsby said during a question-and-answer session hosted by the New York Council on Foreign Relations. “It’s absolutely clear that inflation is coming down.”
Neil Dutta, head of economics at Renaissance Macro Research, said inflation data was likely more of a factor in swaying the market outlook than the Fed’s stance. This was seen through a significant shift in bets on when the Fed would cut interest rates.
According to the CME FedWatch tool, markets are currently pricing in a 37% chance that the Fed will cut rates before its May meeting, down from a 100% chance a month ago. The total amount of cuts investors are seeing this year is also changing. Investors are now pricing in about four rate cuts this year, according to data compiled by Bloomberg, down from a peak of six cuts amid the soft-landing euphoria after December’s Fed meeting. There is.
“The fundamental story remains unchanged. I am reluctant to punt on a rate cut in May,” Dutta said in a note to clients on Wednesday. “There may be some room for some follow-through on inflation, but beyond a month or two it’s hard to understand why soft-landing market dynamics aren’t reaffirmed.”
Keith Lerner, Trust’s co-chief investment officer, agrees with Dutta that the market story didn’t completely change on Tuesday. Although concerns about inflation remain, earnings have exceeded expectations and economic growth remains resilient.
This leaves investors with one important reminder from Tuesday’s selloff. That means the path to lower interest rates and, ultimately, a soft landing remains uneven. We expect some volatility in the stock market.
“After a very sustained period of strength, the market is seeing a modest gut check,” Lerner said in a note to clients Tuesday night. “Tensions between a stronger economy, inflation and Fed policy are likely to continue to result in increased volatility.” [in the market]. ”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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