Macro

S&P 500 Dips 1.5% Amid Inflation, Bull Market Holds

S&P 500 faces 1.5% drop amid inflation concerns, yet underlying bull market shows resilience with strong fundamentals.

By Athena Xu

4/13, 08:39 EDT
S&P 500
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Key Takeaway

  • S&P 500 experienced a 1.5% weekly drop amid bond-market volatility and geopolitical concerns, testing the rally's resilience.
  • Despite recent pullbacks, the market remains in a bull trend with expectations of continued corporate earnings recovery.
  • Gold prices surged, and investor anxiety increased, indicating a period of market flux but also potential buying opportunities.

Market Enters Second Act

After a first quarter that saw the markets embrace a narrative of brisk economic growth and a strong labor market, the second quarter has introduced a level of volatility and uncertainty that has tested the resilience of the rally. The S&P 500 experienced a 1.5-percent weekly drop, influenced by a third consecutive warmer-than-expected Consumer Price Index (CPI) reading. This resurgence of inflation concerns has rekindled bond-market volatility and pushed investors towards reflation assets, highlighting the complex trade-offs between growth, inflation, valuation, and Federal Reserve policy.

Inflation Concerns Resurface

The latest CPI data revealed a 0.4% monthly increase, pushing the annual inflation rate to 3.5%, higher than the anticipated 3.4%. Core CPI, which excludes volatile food and energy components, also accelerated, rising 3.8% from a year ago. This acceleration in inflation has dampened hopes for imminent Federal Reserve rate cuts, with markets adjusting their expectations for the timing of such cuts. The persistence of inflation, particularly in services and shelter costs, suggests a more stubborn inflationary environment than previously anticipated, challenging the Fed's ability to pivot towards easing monetary policy.

Bull Market Tested but Resilient

Despite the recent pullback and inflationary pressures, the underlying bull market remains intact. The S&P 500's ability to bounce off its 50-day moving average and close above it for the 110th straight session underscores the market's resilience. Historical patterns suggest that while pullbacks are normal, especially after a strong rally, the market's fundamentals remain strong. Corporate earnings are expected to grow, and the economy continues to outperform expectations, providing a supportive backdrop for stocks.