A Four-Way Assault on the Bulls

On Tuesday, April 2, all of the major domestic equity indices fell sharply. And while the most-cited reason for the decline was higher yields, that’s not the real reason the S&P 500 declined by more than 1% intraday.

Instead, the declines were driven by what we described to subscribers of our Eagle Eye Opener daily market briefing as a “four-way assault on the bullish mantra” that’s pushed stocks higher since late October.

Specifically, here are the four reasons stocks declined Tuesday.

Higher Rates: This absolutely contributed as the 10-year yield hit a multi-month high of 4.40% and appears to be trying to break out of the “stock positive” 3.75-4.25% trading range. The higher rates were driven by markets reducing expectations for a June rate cut by the Federal Reserve (now just above 60%).

Warning Signs from the Consumer: PVH (formerly Phillips-Van Heusen) is a clothing company that owns brands such as Tommy Hilfiger, Calvin Klein and others. Its guidance was not good (in fact, it was bad) and the primary reason for the soft guidance was concerns about the consumer (and if the consumer restrains spending, hard landing concerns will rise, sharply).

Oil: Very quietly, oil prices have risen to multi-month highs on a combination of optimism towards Chinese growth and rising geopolitical tensions (Iran may execute a retaliatory strike on Israel following the Israeli strike in Syria, which killed a high-ranking Iranian official). Rising oil isn’t necessarily an inflation issue (the Fed will look past it), but it is a growth issue if oil prices stay elevated.

Tech and Health Care Weakness: Tesla, Inc. (NASDAQ: TSLA) posted horrible vehicle deliveries (its worst in years) and while Tesla isn’t an artificial intelligence (AI) company, it is a tangential tech company, and the weakness in electric vehicles (EVs) weighed on tech. Meanwhile, Medicare Advantage pricing didn’t increase, so managed care insurance companies such as Humana Inc. (NYSE: HUM) (a big and widely owned stock) got hit hard as that’s a problem for margins.

Each of these is an attack on a certain part of the bullish mantra argument. Higher rates challenge the idea of looming Fed rate cuts, the horrid PVH guidance challenges the idea of a resilient economy, higher oil challenges the idea of falling inflation and solid growth and the TSLA/EV results attack tech more broadly.

So, what does this mean for markets?

Importantly, none of these items materially alter the market narrative and none of them are bearish gamechangers. But with the S&P 500 trading above 21X earnings, none of them have to be gamechangers to cause a correction.

The S&P 500 has risen more than 25% in five months, and it is trading at 21X earnings. It is entirely reasonable to expect a pullback, and if we get more headlines like we saw Tuesday, we will absolutely get a 5%-ish pullback — although that’s a pullback that we’d likely look to buy as long as the four bullish factors are still in place.

Moreover, this type of volatility is why it might be good to look at lower-beta equity allocations, because the chances of a 5-10% pullback remain greater in the near term than the chances of a 5-10% rally. So, being tactically overweight in lower-beta sectors such as defensive sectors (utilities/staples/healthcare) and focused on quality factors is a good way to weather any correction and take advantage of any pullback.

Another area to look at is longer-duration Treasury holdings and potentially increase them if you are underweight in the segment, as this increase in yields presents an opportunity to leg in. However, that’s only if your equity allocations and the accompanying volatility are too much for your comfort level. The iShares 20+ Year Treasury Bond ETF (TLT) remains one of the easiest ways to quickly add duration to portfolios.

Bottom line, Tuesday’s negative news wasn’t a bearish gamechanger, but it is a reminder that there is ample room for disappointment in this market. More broadly, slowing growth and disappointing earnings remain the No. 1 risks we need to monitor (and we are doing just that for you in the Eagle Eye Opener) and Tuesday’s headlines only reinforced our vigilance.

Want analysis like this in your inbox every trading day by 8 a.m. ET, all for the price of your morning cup of coffee? If the answer is “yes,” (and why wouldn’t it be?) then I invite you to check out my Eagle Eye Opener, right now.

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More Viking Wisdom

“Cattle die, kinsmen die, all men are mortal. Words of praise will never perish, nor a noble name.”

— Hávamál

In keeping with this week’s Viking theme, I thought it appropriate to include one of my favorite quotes from the Hávamál. You see, while all creatures that inhabit the earth will one day be no more, our deeds persist and reverberate throughout eternity. Remember that the next time you have an opportunity to issue a word of praise, or to act in line with your noble name.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods