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The S&P 500 is Expected to Have Its Worst Month Since 2022 as Bond Yields Jump Amid Inflation Concerns

April 21, 2024
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The recent surge in bond yields, fueled by concerns about persistent inflationary pressures amid a robust economy, has interrupted the bull run of the U.S. stock market. The S&P 500 is poised for its most significant monthly decline since December 2022, with April's retreat wiping out approximately half of the gains accrued in the early months of the year. Despite this setback, the index remains just 5.5% below its record high reached on March 28.

According to Bob Elliott, CEO and CIO of Unlimited Funds, investors correctly anticipated strong economic growth in the U.S. for the year. However, this positive outlook was already reflected in stock prices, leaving bond yields to catch up. Elliott suggests that long-term Treasury rates may need to rise further to temper demand in the economy before the Federal Reserve is confident that inflation is on a sustainable path towards its 2% target.

As investors await the Bureau of Economic Analysis' estimate of first-quarter GDP growth on April 25, early indicators suggest continued resilience in the economy despite the Fed's efforts to curb inflation through monetary tightening. The Atlanta Fed's GDPNow tracker projects robust growth in real GDP for the first quarter, indicating a positive end to the quarter for the American economy.

Furthermore, jobless claims data and low unemployment rates underscore the strength of the labor market, contributing to consumer spending and inflation concerns. Wage growth, particularly among lower-income groups, remains robust, supporting consumer spending even as nominal wage growth moderates. Meanwhile, rising commodity prices, including industrial metals, precious metals, and oil, pose challenges for the Fed and consumers alike.

Looking ahead, traders in the federal-funds futures market anticipate minimal intervention from the Fed, with expectations of only one or two rate cuts in 2024, compared to earlier projections of six or seven cuts. This cautious approach reflects the current macroeconomic environment, characterized by strong economic data and resilient financial markets.

Despite recent market volatility, U.S. stocks continue to trade at elevated levels, with the S&P 500 remaining significantly above its October lows. Elliott suggests that a substantial and sustained increase in long-term rates, potentially to levels between 5% and 5.5%, may be necessary to sufficiently moderate economic activity and bring inflation down to the Fed's target.

In summary, while the recent uptick in bond yields has introduced volatility into the market, the overall outlook for the U.S. economy remains positive. However, concerns about inflation and the Fed's response continue to influence investor sentiment and market dynamics, underscoring the importance of monitoring economic indicators and central bank policies in the coming months.

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