Friday's Market Minute: Markets Retreat as Bulls Have Become Complacent

The U.S. stock market has performed relatively well so far this year despite yesterday’s retreat across major indices. With the S&P 500 up over 7% year to date, investors have remained confident that liquidity concerns within the banking system remain intact and the rate of change in inflation has moderated to a manageable degree.

The first quarter earnings released by a group of regional banks were better than anticipated. Most reported lower deposit levels as expected, but the pace of deposit outflows to large money center commercial banks is likely to slow. 

Perhaps the fundamental backdrop of the overall economy, corporate profitability, and excessive fears of imminent recession have been overblown thus far. The labor market suggests some softening as the number filing new jobless claims rose slightly by 5,000 to 245,000. However, these are not levels that will alleviate higher wages, which implies inflationary pressures will most likely not subside unless there is a meaningful decline in the overall health of the labor market.

The widespread belief among investors that the Fed will begin cutting interest rates sooner than officials have signaled could also in part explain positive investor sentiment and meaningful year to date equity performance. Even as the Fed is likely to raise rates 25 basis points higher next month and subsequently pause for further data analysis, they are unlikely to pivot as quickly as complacent investors have.

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