Is The S&P500 Suffering From Short-term Fatigue?

Equities are exhibiting signs of mild fatigue. Breadth has begun to narrow, and new highs have sagged compared with new lows (see chart). Both of these technical developments have warned of previous tactical pullbacks. The recent reset in oil prices may also test investor nerves.

Oil prices have been a critical macro variable, because they influence inflation expectations and the corporate bond market (high yield bond spreads shown inverted, see chart). Crude oil price
corrections have accurately timed equity retreats (see chart), and general risk aversion phases. To be sure, the global economy is no longer on a deflationary precipice, suggesting that weaker oil prices may not foreshadow a soft patch, but they may be a good enough excuse for profit taking in the equity market after a good run.

Contrary to popular perception…

For additional details, please see the U.S. Equity Strategy latest report titled: ”Reading The Market’s Messages”, available at

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The Fed’s “Unhike”

Financial assets rallied, while the dollar declined in the aftermath of yesterday’s FOMC meeting. This resulted in an easing in financial conditions, making the Fed’s actions an “unhike” of sorts.


The FOMC meeting produced a number dovish surprises. First, the median Fed forecasts still calls for three hikes this year instead of four, as some observers had anticipated. Second, the estimate for the structural rate of unemployment was scaled down further by a tenth of a percentage point to 4.7%. Third, the FOMC statement said that the Fed was looking for a “sustained” return to 2% inflation, while also referring to its inflation target as a “symmetric” one. Fourth, Minneapolis Fed President Kashkari dissented in favor of keeping rates unchanged, which few people had expected.

Having said all this, the market’s reaction still seems rather excessive. The key message from the March meeting was that the Fed now sees inflation as having essentially reached its 2% target. This was reflected in the decision to strip the reference to the “current shortfall of inflation” from the statement. As far as the reference to the Fed’s “symmetric” target is concerned, this is something that Chair Yellen and other FOMC officials have stressed many times before. All it means is that the Fed will not react too aggressively if core inflation were to drift somewhat above 2%. It does not mean that the Fed will purposely try to engineer an inflation overshoot. If it had wanted to do that, it would have lifted its 2019 inflation forecast. It didn’t do that; it remains stuck at 2%.

Why then did the FOMC bothered massaging the language? The answer is that the Fed was probably worried about destabilizing markets. After all, investors were pricing in only a small probability of a March hike just a few weeks ago. A “hawkish hike” could have caused markets to rethink their view that the Fed will “take it slow”. However, now that financial conditions have eased sharply in response to the FOMC’s decision, it is likely that Fed speeches will lean in a more hawkish direction over the coming weeks if the economic data come in firm. Our bond strategists recommend maintaining a below-benchmark duration stance.