With so much global unrest and uncertainty hanging over the markets and the Fed clearly on hold for a bit longer with rate cuts, risk assets needed a reason to sell off. We got that last week with Israel’s retaliatory strike on Iran. While the strike seemed limited in scope, the risk of further escalation now hangs over the markets. Oddly, U.S. Treasuries, which typically would rally during global unrest, sold off as the Fed’s position on rates outweighed the troubles in the Middle East. The 10-year U.S. Treasury closed the week at 4.62%, 12 basis points lower than the previous week.  

U.S. Economy 

Interest rates continue to rise as they have all year, and we believe the current elevated rates will remain at this level for quite some time for three simple reasons. First, the economy continues to surprise on the upside with steady growth and expansion. Second, the labor market remains strong, with an unemployment rate near a 50-year low of 3.8% (BLS – Bureau of Labor Statistics). Third, inflation has not reached the Fed’s 2% target and, conversely, could remain above their target for 2024. See Chart 1 below from Apollo showing potential paths for inflation into year-end 2024.  

Policy and Politics 

As the latest escalation settles down, we expect markets to follow suit and settle down as well, but further retaliation from either side would force a flight to safety and quality, and we would expect U.S. Treasuries to rally and yields to fall as a result, so stay tuned!  

In nationwide polls, President Biden and former President Trump are neck and neck. Still, Biden lags by approximately three percentage points in the crucial swing states that could determine the electoral victory. According to Prediction Markets, there is a 55% probability of a Democratic triumph. 

Economic Numbers to Watch This Week 

• U.S. Durable Goods New Orders MoM for March 2024, prior 1.37% 
• U.S. Real GDP (Gross Domestic Product) for 1^st Quarter 2024, prior 3.4% 
• U.S. claims for Unemployment Insurance for the week of April 20, 2024, prior to 212,000 
• U.S. Core PCE (Personal Consumption Expenditures) Price Index YoY for March 2024, prior 2.78% 
• U.S. PCE Price Index YoY for March 2024, prior 2.45% 
• U.S. Index of Consumer Sentiment for April 2024, prior 77.90 

Following a strong stock market rally over the last six months, recent weeks have seen a softening trend. Market corrections are typical, and three main drivers of recent volatility have emerged: a reevaluation of Fed rate cut expectations, escalating geopolitical tensions, and ongoing first-quarter earnings season concerns. Despite market adjustments, the extent of the pullback has been contained against a still healthy macroeconomic picture and corporate earnings growth. We remain optimistic as CEO confidence is on the rise, indicating a greater willingness among firms to allocate more capital this year compared to last year. This confidence typically translates into increased hiring and investment in capital expenditures. Please reach out to your advisor at Valley National Financial Advisors with any questions.  

Geopolitical tensions combined with updates on labor markets fueled a volatile week of trading in both stocks and bonds. The Dow Jones Industrial Average fell -2.3% for the week, the S&P 500 Index fell –1.0%, and the NASDAQ fell -0.8%. Energy was the best-performing sector for the week (+2.8%), while Health Care was the worst-performing sector (-3.9%). First-quarter earnings season begins this week with the large-cap banks. JP Morgan, Wells Fargo, and Citigroup will report results this Friday. As the “higher for longer” feeling sunk into the fixed-income markets, traders reacted by selling bonds, and as a result, the 10-year Treasury rose 18 basis points to close the week at 4.39.

U.S. Economy 

Strong economic results raised overall concerns about the Federal Reserve rate cut timeline. The week ended positively with a robust jobs report indicating a healthy labor market, low unemployment, and steady wage growth, easing inflation worries. Despite concern over Fed actions, markets closed with optimism, interpreting the jobs report as a sign of continued economic and corporate growth. We continue to closely monitor the price of oil, which surged to a six-month high on Friday. A sustained upward trend in oil prices could reignite inflationary pressures, complicating Federal Reserve efforts to manage inflation. See the chart below from Trading Economics, which shows Crude Oil prices over the last year. 

Policy and Politics 

Over the weekend, news of the Israeli military’s withdrawal of ground troops from the Gaza Strip sparked optimism. This comes as Egypt offers to host a new round of talks aimed at reaching a ceasefire and hostage release deal. Both Israel and Hamas have agreed to participate. Over the last week, Russian drone attacks in Kharkiv intensified last week, causing casualties and damage. National polls indicate a continued tight race with President Biden and former President Trump neck-and-neck as Democrats claim a significant fundraising lead over Republicans.

Economic Numbers to Watch This Week 

• U.S. Consumer Price Index for March 2024, prior 0.4% 
• Minutes of Fed’s March FOMC meeting. 
• U.S. Producer Price Index for March 2024, prior 0.6% 
• U.S. Import Price Index for March 2024, prior 0.3% 

Last week, several Federal Reserve presidents provided updates, reinforcing the view that the economy continues to perform well. We look forward to updates from multiple large banking institutions later this week, which should provide valuable data points on the banking industry and economy. As more companies start releasing their earnings in the upcoming weeks, we will be listening for indications of improved sales and earnings growth across a wider spectrum of businesses beyond the dominant mega-cap tech stocks. Geopolitics will continue to be a risk that could derail the otherwise healthy macroeconomic outlook. Please reach out to your advisor at Valley National Financial Advisors with any questions.