‘Higher for Longer’ Weighs on the Markets

Building on the previous Friday’s declines, financial markets continued their march lower last week as volatility spiked and the likelihood of near-term interest rate cuts by the Fed was further dampened. The S&P 500 fell 3.04% and the technology-heavy NASDAQ dropped 5.52%, while the Dow eked out a gain of 0.05% after being down most of the week.¹ The decline in the indices was accompanied by a rise in the CBOE Volatility index, which reached 19 – a level not seen since October 2023.²

For most of the week, the S&P 500 rallied into the green at one point during each day’s trading session, only to succumb to selling pressure and give up gains before the close.

On Tuesday, Fed Chair Powell acknowledged in a speech that, while inflation continues to make its way lower, it hasn’t moved quickly enough, and the current state of [monetary] policy should remain intact. “More recent data shows solid growth and continued strength in the labor market, but also a lack of further progress so far this year on returning to our 2% inflation goal.”³ The comments follow the higher-than-expected inflation data through the first three months of 2024.

Treasury yields rose all along the yield curve as the “higher for longer” scenario gained momentum, with the two-year Treasury note nudging 5% and the 10-year Treasury bond rising to 4.64%, its highest level since November.⁴ The Bloomberg US Aggregate Bond Index declined 0.61% for the week.⁵

Financials took center stage as 1Q corporate earnings season picked up momentum. Rebounding from the previous week’s declines, investors viewed favorably positive earnings results from a diverse group of financial institutions including Goldman Sachs, Charles Schwab, and M&T Bank (M&T). Goldman Sachs shares rose after the company beat Wall Street’s expectations, with earnings fueled by its trading and investment banking businesses.⁶ Charles Schwab, the online brokerage and money manager, reported earnings matching estimates while revenue came in slightly higher than analysts’ consensus forecasts.⁷

A common theme among most regional banks, M&T Bank included, has been the decline in net interest income (NII) as institutions have had to pay higher interest rates to retain deposits. M&T reported NII declining 5% on a year-over-year basis, while similarly positioned banks such as Citizens Financial, US Bancorp and Keycorp reported NII declines of 12%, 14% and 20%, respectively.

The S&P sector most negatively affected by the recent pullback has been Technology, as the Technology Select Sector SPDR ETF (XLK) corrected by 6.27%. Its largest holdings, which include Microsoft, Apple, Broadcom, Nvidia and Salesforce, declined in a range of 5.4% to 13.5% for the week, while the iShares Semiconductor Index (SOXX) retreated 9%.⁸

Economic data out last week showed US retail sales climbing by 0.7% in March, outpacing the market’s expectation of 0.3%, led by higher online and gasoline sales. This further supports the notion that consumption remains strong despite inflationary pressures.⁹

The likelihood of near-term interest rate cuts has diminished. According to the CME’s Fedwatch tool, a better than 50% chance of a rate cut is not expected until the Fed’s September meeting.¹⁰

Sources:

1. Morningstar Direct
2. https://www.cnbc.com/quotes/.VIX
3. https://www.cnbc.com/2024/04/16/powell-cites-lack-of-progress-this-year-in-reaching-feds-inflation-goal.html
4. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202404
5. Morningstar Direct
6. https://www.cnbc.com/2024/04/15/goldman-sachs-gs-earnings-q1-2024.html
7. https://www.cnbc.com/2024/04/15/stocks-making-the-biggest-moves-midday-tsla-gs-crm.html
8. https://www.cnbc.com/quotes
9. https://www.cnbc.com/2024/04/15/retail-sales-jumped-0point7percent-in-march-much-higher-than-expected.html?&qsearchterm=retail%20sales
10. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html