Markets will be looking for clues from the Fed going forward, as a historically strong month begins

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, the US, March 29, 2022.

Brendan Mcdermid | Reuters

The stock market is headed for what promises to be a volatile second quarter, but April is traditionally the best month of the year for stocks.

Major indices were higher in March but posted a weak performance for the first quarter, the worst since the pandemic. Investors have been worried about rising interest rates, the war in ukraine and inflation, made worse by disruptions in commodity exports from both Russia and Ukraine.

Stocks are usually higher in April, and it is historically the best month of the year for the S&P 500. The S&P is up 70% of the time and has gained an average of 1.7% in every year since World War II, according to Sam Stovall, chief investment strategist at CFRA. For all months, the S&P averaged a 0.7% gain.

The S&P 500 rose 3.6% in March and Stovall said the rally could continue. “I think we’re back to break even, but I wouldn’t be surprised if we go through another pullback or correction before we have a year-end rally,” he said.

The market’s focus in the week ahead will continue to be squarely on developments surrounding the Ukraine war and the Federal Reserve. On Wednesday, the Fed is scheduled to publish the minutes of its March meeting, where it raised interest rates for the first time since 2018.

There are also a handful of speakers from the Fed, including Fed Governor Lael Brainard speaking on Tuesday.

Greg Faranello, head of US rates at AmeriVet Securities, said the Fed’s minutes could be the highlight of the week as the central bank is likely to provide more details on its plans to reduce its balance sheet. The Fed has nearly $9 trillion in securities on its balance sheet, and a reduction in those holdings would be another step in tightening policy.

β€œThe market is curious. They’re going to be looking for some clues in terms of how fast, how big, what the tops look like,” Faranello said.

The economic data calendar is light, with factory orders on Monday, international trade and ISM services on Tuesday and wholesale trade on Friday.

Traders will also be keeping an eye on company comments ahead of the first-quarter earnings reporting season, which begins in mid-April.

“First quarter earnings have actually been improving in the last month, so that’s encouraging,” Stovall said.

Goodbye to the first quarter

the dow fell 4.6% in the first quarter, while the S&P 500 down 5%. The worst performer by far was the Nasdaq, down 9.1%. Last week, the Dow Jones and S&P were slightly negative, while the Nasdaq was flat.

Interest rates also moved dramatically during the quarter, with the benchmark 10-year Treasury yield temporarily touching a high of 2.55% in the last week, after starting the quarter at 1.51%.

On Friday, the 10-year bond yielded 2.38%, while the two-year yield, which most reflects the Fed’s policy, was 2.43%. The two-year bond yielded 0.73% at the beginning of the year.

Faranello said bond yields may continue to rise on inflation concerns but could consolidate before another big move.

“I think the market is looking for a new catalyst here,” he said. “I just think the first quarter has been about pricing the market, and we have… The Fed was very aggressive. We did a dramatic pricing. Now, we need to see more data to see how this works out.” It’s going to evolve in the second quarter.”

Stovall said the S&P 500’s first-quarter performance is one of the 15 worst first quarters since 1945. After those weak quarters, down 3.8% or more, the second quarter was better on average. The drop in the first quarter of this year was tied with that of 1994, which had 12the worst first trimester

After those weak first 15 quarters, “we actually went up 4.8% in the second quarter and raised the price two times out of three,” he said. But for the entire year, the S&P 500 gained only 40% of the time and was down an average of 2% in those years.

But this year is a midterm year, and in those years the second and third quarters are usually the weakest. “Of those 15 worst quarters, five of them were midterm years, and of those five, the second quarter was up 1% on average, and its price was up only 40% of the time,” Stovall said.

Stovall said the market could be on the upside in the second quarter, but will face headwinds. “Oil prices are likely to stay high. Interest rates certainly won’t come down,” he said, adding that geopolitical pressures are likely to remain. “I see the possibility of a 1% gain. We could probably get something good out of it.”

Stocks were held hostage to rising and volatile oil prices in the first quarter as the world struggled to offset Russia’s export barrels. Many customers refused to buy Russian oil for fear of running afoul of financial sanctions on Russia’s financial system.

After wild swings both higher and lower, West Texas Intermediate Oil Futures it gained 39% in the first quarter, the eighth consecutive positive quarter and its best first quarter since 1999. WTI was just below $100 a barrel on Friday afternoon.

choppy and volatile market

Joe Quinlan, head of CIO market strategy for Merrill and Bank of America Private Bank, said he is constructive on the market heading into the second quarter but sees some tough spots ahead.

“We have to solve the inflation problem and get the Fed to catch up with market expectations,” Quinlan said. “We have to re-anchor inflation. It’s going to be a choppy and volatile year. We’re leaning more towards hard assets, whether it’s commodities, power and natural gas.”

Quinlan said he favors stocks over fixed income, which has also been unusually volatile. “We’re using stocks as a hedge against inflation,” she said. “Within that framework are more hard assets, fuels, complex agriculture in general, and metals and minerals.”

In the second quarter, the stock market will continue to adjust to a hawkish Federal Reserve in the context of what should have been a strong economy. With 431,000 payrolls added in Marchemployment data continues to be strong, but there are fears that the Federal Reserve will raise interest rates too quickly, derailing the economy and pushing it into recession.

Futures market traders expect the Fed to increase its firepower at its next meeting in early May, raising interest rates by 50 basis points, or half a percent. The Fed’s first rate hike was a quarter point at its March meeting.

The market is pricing in the equivalent of eight quarter-point hikes, and Treasury yields have risen with astonishing speed as market expectations for interest rates have shifted. the two-year Treasury yield rose above the 10-year Yield, or inverted last week, for the first time since 2019. That is seen by the market as a warning sign of a recession.

Fed officials have signaled that they want to act to cut the balance sheet soon. Kansas City Fed President Esther George last week He said the Fed’s balance sheet will have to shrink significantly. She said the Fed’s Treasury bond holdings may have depressed the 10-year yield, causing the yield curve to invert.

Faranello said interest rates could still rise due to inflation concerns, but rates could consolidate after their recent increase. The yield curve could also remain inverted.

“We can stay like this for a year and a half. Everyone is screaming that a recession is coming… I don’t think the yield curve is telling us that a recession is about to happen,” Faranello said.

week ahead schedule

Monday

10:00 a.m. Factory Orders

Tuesday

8:30 a.m. International Trade

9:45 PMI services

10:00 ISM Services

11:05 a.m. Federal Reserve Governor Lael Brainard

2:00 p.m. New York Fed President John Williams

Wednesday

Profits: levi strauss

9:30 a.m. Philadelphia Fed President Patrick Harker

2:00 p.m. FOMC Minutes

Thursday

Profits: WD-40, Brands Conagra, constellation markings, Weston lamb

8:00 a.m. St. Louis Fed President James Bullard

8:30 a.m. initial claims

2:00 p.m. Atlanta Fed President Raphael Bostic

2:00 p.m. Chicago Fed President Charles Evans

15:00 Consumer credit

4:05 p.m. New York Fed Williams

Friday

10:00 a.m. Wholesale trade

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