Investing.com - Investors face a volatile week in financial markets, watching geopolitical risks and the central bank narrative.
"Equities got off to a flying start in 2024, with the S&P 500 annualising its best year in 70 years. However, April has been more challenging, as expected, and we are on the verge of a market 'pullback' that is long overdue. The proximate cause is the Fed's readjustment of rate cut expectations and rising bond yields. We see this as a healthy breather, with prolonged weakness to buy," says Ben Laidler, Global Markets Strategist at eToro.
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"The two pillars of the bull market, earnings growth and rate cuts yet to come, remain in place, while significant cash remains on the sidelines. We focus on the cheapest and most economically sensitive sectors and regions, from financials to Europe. A short-term counter-signal is the volatility of VIX," he adds.
Withdrawal
"Market crashes are inevitable. There is no profitable investment without risk," says Laidler. "US stocks have averaged a long-term annual return of 10%, and historically they go up much more than they go down. The S&P 500 has averaged three modest 'pullbacks' of more than 5% per year (see chart), far more frequent than 10% 'corrections' or rare 20% 'crashes', while the average intra-year decline of the S&P 500 has been a sizable -14%," Laidler explains.
"Last year, for example, the S&P 500 recorded an intra-year correction of -10%, but ended up 24% higher on a calendar year basis. Whereas 2020 saw a much worse intra-year slump of -34%, but the index still rose 16% for the full calendar year," he adds.
Drivers
Stock markets are in a short-term rut, Laidler warns, pressured in three ways.
- A repricing of later and smaller Fed rate cuts, stronger GDP growth and stronger inflation. This is pushing bond yields higher and particularly affecting those with high valuations, such as technology, or high debt, such as real estate.
- Elevated geopolitical uncertainty, from Ukraine to the Middle East, has contributed to the US dollar rally and the VIX rally to long-term average levels.
- The weak technical backdrop of strongly bullish markets, elevated investor sentiment and a statistically outperformed pullback, with weak mid-year seasonality that could now be brought forward to April.
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