Last Week on Wall Street

Last Week on Wall Street - April 13th, 2024

S&P 500: -1.56% DOW: -2.37% NASDAQ: -0.46% 10-YR Yield: 4.52%

What Happened?

Inflation concerns and geopolitical tensions led to significant losses in the stock market this past week, with the Dow Jones, S&P 500, and Nasdaq all closing with notable declines. The Dow dropped by 1.2% on Friday alone, culminating in a weekly loss of 2.4%, its largest since March 2023. Similarly, the S&P 500 and Nasdaq fell by 1.5% and 0.5%, respectively, for the week. A particularly alarming consumer-price report mid-week reignited fears of persistent inflation, dampening hopes for imminent Federal Reserve rate cuts, despite a brief respite provided by lower wholesale inflation figures.

Amidst this financial unease, geopolitical conflicts also influenced market movements. Tensions between Iran and Israel escalated, prompting the U.S. to deploy warships as a protective measure, which in turn pushed oil prices higher. The stock market's volatility index rose, reflecting increased market volatility. On the corporate front, major banks reported mixed first-quarter earnings, with some surpassing expectations but also forecasting challenges due to prolonged high interest rates. As investors brace for more comprehensive earnings reports, the outlook remains cautious with concerns that high valuation levels could be unsustainable if corporate profits do not meet optimistic projections.

Beneath the surface, each sector of the S&P 500 closed the week in the red. Financials took the hardest hit, falling 3.6% due largely to declines in major bank stocks like JPMorgan and worries over net interest income projections. Close behind, was the Materials sector (-3.1%), and Healthcare (-3.0%).


Consumer Prices Rose 3.5% From a Year Ago in March, More Than Expected

  • The consumer price index, a key inflation gauge, rose 3.5% in March, higher than expectations and marking an acceleration for inflation.
  • Shelter and energy costs drove the increase. Energy rose 1.1% after increasing 2.3% in February, while shelter costs were higher by 0.4% on the month and up 5.7% from a year ago.

The key takeaway - Inflation pressures intensified unexpectedly during the month of March, casting doubt on the Federal Reserve's ability to initiate interest rate cuts as soon as June. The Consumer Price Index (CPI) recorded a 3.5% increase from the previous year, driven largely by the shelter and energy sectors which contributed to over half of the month-over-month headline gain. Energy prices rose significantly by 1.1% month-over-month and 2.1% year-over-year—the first annual increase since February 2023—largely due to higher gasoline prices. The shelter component also saw a notable increase of 0.4% month-over-month, contributing significantly to the year-over-year rise in core CPI, which excludes food and energy prices.

Core CPI itself rose by 0.4% for the month and 3.8% from a year earlier, with the annualized rate over the last three months hitting a 10-month high of 4.5%, signaling that inflation might persist longer than anticipated. This rise was largely driven by increases in shelter costs, which alone accounted for over 60% of the year-over-year core inflation gain. Core services inflation, which is particularly sensitive due to its connection to the strong labor market, continues to be a focal point for the Fed. Despite some categories like core goods prices showing a decline—highlighted by a 1.1% drop in used vehicle prices—the overall inflationary environment remains challenging. The Fed, anticipating a need for cautious monetary policy adjustments, may delay rate cuts, especially if upcoming economic data does not show a significant cooling of the economy. These factors are crucial as the Fed balances the risk of rekindling inflation against the harm prolonged high rates could inflict on employment levels.


U.S. Moves Warships to Defend Israel in Case of Iranian Attack

  • The U.S. has positioned two destroyers in response to potential threats from Iran.
  • President Biden indicated that an Iranian strike on Israel could happen "sooner than later" and emphasized a strong defensive stance for Israel.
  • Foreign ministers of Germany and the U.K. directly appealed to their Iranian counterpart not to attack Israel, and similar messages were conveyed by Saudi Arabia and Qatar.

The key takeaway - Amid escalating tensions, the U.S. has mobilized warships to protect its forces and Israel, anticipating a potential direct attack from Iran. This strategic move follows warnings of an imminent threat, although Iranian officials have not confirmed a decision to attack. General Erik Kurilla of the U.S. Central Command and Israeli Defense Minister Yoav Gallant have asserted their readiness to defend against any aggression. The U.S. deployment includes destroyers equipped with advanced missile-defense systems.

The situation is compounded by regional conflicts and international diplomatic efforts to prevent escalation. President Biden has underscored the U.S. commitment to Israel's defense, reflecting widespread international concerns. Meanwhile, Iran’s retaliatory threats follow an Israeli airstrike in Damascus, and the potential for conflict has prompted international calls for restraint from both Western and Middle Eastern nations. As the situation develops, global leaders are closely monitoring the impacts on geopolitical stability and preparing for various outcomes.


US Budget Deficit Exceeds $1 Trillion for March

  • In the first six months of the fiscal year, the US budget deficit reached approximately $1.1 trillion, 3% lower than the same period last year.
  • From October to March, receipts increased by 7% to a record $2.2 trillion. Concurrently, outlays rose by three percent, totaling over $3 trillion.
  • Interest payments on the public debt surged by 36% to $522 billion due to higher borrowing costs.

The key takeaway - The US budget deficit reached over $1 trillion in the first half of the fiscal year, despite a slight 3% decrease from the previous year's figures, as reported by the Treasury Department. This period saw a notable rise in receipts, increasing 7% to hit a record $2.2 trillion, driven by a 32% surge in corporate tax collections and higher individual tax payments. However, expenditures also grew, rising 3% to exceed $3 trillion, with a significant 36% increase in interest expenses on public debt, which totaled $522 billion due to higher borrowing costs.

Additional government spending included a 6% increase in defense to $410 billion and an 8% rise in Social Security payments to $741 billion. Meanwhile, March expenditures dropped partly because there were no major bank failures requiring Federal Deposit Insurance Corporation payments, unlike last year with the collapses of Silicon Valley Bank and Signature Bank. This financial landscape poses challenges for President Joe Biden, especially as the 2023 fiscal year saw a deficit expansion to $1.7 trillion amid lower tax revenues and persistently high interest rates.


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