A Fedspeak-fueled Stock Rally Stalls

The stock market paused its rally, despite still being on track for its most impressive week in 2024, amidst speculation that the Federal Reserve might be poised to cut interest rates as early as June.

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Equities showed signs of stagnation following a surge that propelled the S&P 500 up by over 2% since last Friday. Notably, Tesla Inc. led losses among major companies, while Nike Inc. and Lululemon Athletica Inc. experienced declines due to disappointing outlooks. However, FedEx Corp., often considered an economic indicator, surged on the back of solid earnings and the announcement of a $5 billion buyback program.

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In the absence of significant economic data, market participants closely monitored comments from various Federal Reserve officials. Although Jerome Powell's remarks at a "Fed Listens" event omitted discussions on monetary policy, Vice Chair for Supervision Michael Barr and Atlanta Fed President Raphael Bostic were slated to provide insights.

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"Ultimately, attention will refocus on the Fed today, and any statements from officials challenging the notion of three rate cuts in 2024, amidst a strengthening economy, may trigger profit-taking following this week's robust post-Fed decision rally," remarked Tom Essaye, founder of the Sevens Report.

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The S&P 500 remained relatively unchanged after achieving its 20th record high this year, while yields on 10-year Treasury bonds dropped by five basis points to 4.22%. Bitcoin retraced over 10% from its peak. China's tentative relaxation of its control over the yuan resulted in a depreciation of the currency, affecting other Asian currencies in the process.

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Despite a relatively calm end to the week, stock outflows were significant in the lead-up to the highly anticipated Fed policy meeting. U.S. equity funds experienced redemptions totaling approximately $22 billion in the week through Wednesday, marking the largest outflow since December 2022, according to Bank of America Corp. citing EPFR Global data. This trend marked a sharp reversal from the previous week, which saw record inflows into stocks.

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Following the Fed's decision, stocks surged on the perception that the central bank was less hawkish than anticipated. Despite concerns surrounding inflation, Powell appeared unperturbed by recent inflationary trends.

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Analyzing Fed rate cycles since the 1970s, Ryan Grabinski at Strategas Securities highlighted that investors typically face greater risks following the first rate cut in a cycle than during a pause.

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David Lefkowitz at UBS Global Wealth Management maintained a neutral stance on U.S. equities in their tactical asset allocation. He cautioned that elevated sentiment and positioning indicators might precede a modest pullback in the coming months, potentially providing opportunities for investors to bolster equity positions.

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Bill Gross, former bond king, warned of a turbulent journey for investors amid what he described as "excessive exuberance" pervading financial markets. Gross attributed this exuberance to factors such as fiscal deficit spending and enthusiasm for artificial intelligence, suggesting that momentum and irrational exuberance have been dominant market forces since 2022.

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Contrarily, HSBC strategists dismissed concerns of a stock market bubble, upgrading their view on U.S. stocks to "tactically overweight." They emphasized that while re-accelerating inflation poses a risk, central banks and markets are unlikely to react significantly in the near term.

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According to Goldman Sachs Group Inc. strategist Peter Oppenheimer, equity valuations outside the U.S. appear relatively more appealing following the recent surge in technology megacaps. Oppenheimer suggested that as interest rates decline and a soft landing is achieved, opportunities may arise in more cyclical segments of the market.

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Mohamed El-Erian considered a yield on 10-year Treasuries around 4.25% to be a reasonable average for 2024, reflecting one of the year's significant developments.

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Following the Fed's March policy meeting, the yield curve steepened sharply before retracting later in the week. This anticipated return to normalcy, where longer-term yields surpass their short-term counterparts to compensate for risk over time, remains imminent, according to the president of Queens' College, Cambridge, and Bloomberg Opinion columnist.

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