Why The Sky Is Falling…

Following a +10% return in the S&P 500 in the January to March period, Investors may be surprised by the rapid turnaround in the major indices since calendar turned to April.

But what exactly is causing the sell-off in stocks?

It’s these three things happening concurrently…

10-Year Treasury Yields On the Rise

In the July-October period in 2023, the huge run-up in 10-Year US Treasury yields to 5% sparked a massive sell-off in stocks.

At the end of October, as the Fed announced the end to its rate hiking cycle, yields collapsed, which caused the significant rally in the major indices from October 2023 into the first quarter of 2024.

A sudden spike in yields back above 4.3% is increasing pressure on stocks as we turn the calendar over. 10-year treasuries had held below that level throughout the rally of the last 6 months. If yields continue to rise toward 4.5%, or higher, this will continue to weigh on stocks and likely lead to a 5-10% correction in the S&P 500.

Manufacturing Turns the Corner…BUT

The latest ISM Manufacturing data was released on Monday, April 1 and showed that the manufacturing sector had transitioned from contraction to expansion for the first time in 16 months. As well, the outlook for manufacturing is rising for 2024, based on new orders and forward expectations.

But…

The latest report also showed a rapid rise in ‘prices paid.’ That’s manufacturing speak for “inflation.” That rise in prices cast new doubt on the Fed’s ability to cut rates in June or July.

Now, it is only one report from one month, but if that price increase trend continues into May or June, the Fed may be forced to push back their planned rate cuts until late 2024 or even 2025!

The Yen

If you’re not familiar with the “yen carry trade” (and really, who is?) I won’t bore you with the details. Suffice it to say this: A rapid fall in the value of the yen is creating pressure on Treasuries (which is increasing yields as we just discussed); and, also increasing the value of the dollar (not a good thing for stocks).

Together, these three occurrences are working against stocks as we open the month of April

Can it turn around? Yes, absolutely: but other data would have show that:

Inflation is maintaining its slow decline.

Growth in the economy is holding steady.

Unemployment is not spiking (see Friday’s Jobs Report)

It isn’t a pretty start to spring in the stock market, but we have a long way to go to call April a bust.

The SPY Laddered Put Hedge is one way to defend against a potential correction. We’ll make this trade play in one of our services this week and report back to you how we constructed it and our expectations for the trade.

Come back tomorrow for that trade analysis and on Friday for our Q1 Wrap up and Q2 Outlook!

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