The markets in 2024 are facing what screenwriters call “second-act problems,” where escalating conflicts and uncertainties are creating a muddled middle phase after a neat and tidy first quarter. The year started with a consensus on brisk economic growth, a strong labor market, ebbing inflation, and record stock prices. However, a warmer-than-expected CPI reading last week stirred up bond-market volatility, reigniting concerns about growth, inflation, valuation, and Fed policy. This led to a 1.5% weekly drop in the S&P 500, with additional concerns arising from geopolitical tensions.
Despite the recent market turbulence, the bull market backdrop remains intact, with signs pointing to further upside potential. The rally from October 2023 through March has been persistent and broad, indicating that the market has not yet reached its peak. While the recent pullback may be unsettling, it is not unexpected given historical market patterns. The focus now shifts to corporate earnings recovery, with expectations of strong growth in the first quarter. Market reactions will likely be noisy, exposing pockets of “excess belief” among investors, but also presenting potential buying opportunities as the reporting period progresses and market expectations are recalibrated.
In a period of flux and uncertainty, it is essential to assess the current backdrop and maintain perspective on inflation, Fed policy, and corporate earnings. While short-term momentum may have been broken, the market’s resilience and historical trends suggest that a reset of attitudes is underway. The recent market volatility serves as a test of the premises that underpinned investor confidence earlier this year, highlighting the need for adaptability and a cautious approach in navigating the evolving market landscape.
