Stocks had one of their worst days of 2024 on Tuesday as a hotter-than-expected inflation report spooked investors.
But with stocks at record highs, many Wall Street strategists pointed out that there were signs of resilience on a day where the Dow (^DJI) dropped more than 500 points and the S&P 500 (^GSPC) fell about 1.4%. And perhaps Tuesday’s pullback was merely just a matter of time given the recent record highs seen across the market.
Baird market strategist Michael Antonelli pointed out to Yahoo Finance that the market had tracked basically “straight up since January,” and some form of a pullback from those levels is typical.
“This is not, frankly, all that surprising to me,” Antonelli said. “I do think that the magnitude of today’s move was eye-opening. It just goes to show people were ready to hit the sell button.”
But, importantly, investors were also ready to buy the dip, and the inflation surprise didn’t send stocks off a cliff. The S&P 500 avoided a 2% daily drawdown, which it hasn’t seen since February 2023. The Russell 2000 (^RUT) didn’t sustainably fall below its 50-day moving average, a key technical factor that reflects the market’s resilience, according to CMT chief global strategist Jay Woods.
This market action falls in line with the takeaway that Fundstrat head of research Tom Lee gave clients after Tuesday’s sell-off. Lee said it’s “still too early” to call a market top for the first quarter of 2024. He added that Tuesday’s market declines felt more like more like “profit-taking as prices retrace gains of [the] last 4 days.”
Notably, a Fed official downplayed Tuesday’s inflation reading, emphasizing that one print doesn’t change the underlying trend seen in inflation data.
“Let’s not get amped up when you get one month of CPI that was higher than what you expected it to be,” Chicago Fed President Austan Goolsbee said during a question and answer session hosted by the Council on Foreign Relations in New York. “It is totally clear that inflation is coming down.”
Renaissance Macro Research head of economics Neil Dutta noted that the inflation print likely did more to shake the market outlook than the Fed’s stance. This was seen through significant shifts in bets on when the Fed will cut interest rates.
Markets are now pricing in a 37% chance the Fed cuts rates by the May meeting, down from the 100% chance seen a month ago, per the CME FedWatch Tool. The total number of cuts investors see this year has moved too. Data compiled by Bloomberg shows that investors are now pricing in roughly four rate cuts this year, down from a peak of six cuts seen amid the soft-landing euphoria that followed the December Fed meeting.
“The underlying story has not changed, and I would be reluctant to punt a May cut,” Dutta wrote in a note to clients on Wednesday. “There might be room for some follow through on inflation, but beyond a month or two, it is hard to see why soft-landing market dynamics don’t reassert themselves.”
Truist co-CIO Keith Lerner agrees with Dutta that the market narrative wasn’t entirely changed on Tuesday. While concerns remain about inflation, earnings have come in better than expected, and growth in the economy has remained resilient.
This leaves investors with one key reminder from Tuesday’s sell-off: The path to lower interest rates and, potentially, an eventual soft landing will remain bumpy. Some volatility in the stock market should be expected.
“Markets are seeing a modest gut check after a very persistent period of strength,” Lerner wrote in a note to clients on Tuesday night. “The tension between a stronger economy, inflation, and Fed policy is likely to continue to result in increased swings [in the market].”
