We went from the end of a civilization to a two-week ceasefire, to a huge risk rally, an inflation jump, to failed peace talks, to a blockade and oil back over $100 and an Orban defeat. Lots to choose from. What should matter to you from last week or this week? The stock market as measured by the S&P 500 Index began the month of April right back where it was in late July of last year. Then a funny thing happened on the way to a bear market; over the past two and half weeks, we’ve enjoyed exactly the kind of parabolic “lock-out” rally many expected late last year fueled by the AI frenzy. Given how negative the backdrop was not that long ago, the swift shift in sentiment has left heads spinning. I've seen all sorts of reasons proffered to try to explain the move, from the obvious to the conspiratorial. Clearly, the headlines conclude it's all down to investor optimism that the war with Iran is effectively over, although that doesn't fully explain why the S&P 500 shot directly above its pre-war levels so quickly even with the fundamentals arguably worse off. We aren't asked to fill out a survey when transacting in the market, so it's never possible to know for sure who is buying and why anyway. The only thing that really matters is that it happens.
Similar overbought extensions in recent years have proven to be bullish over the subsequent few months even if it necessitates a pause or pullback first. Research from Bespoke Investment Group supports this as well. They found 20 other 10% spikes in the S&P 500 over 11 days since 1953, and the average forward return over the subsequent 12 months was 17.14% with 15 of those occasions showing gains (prices were basically flat, on average, over the next week and 1.89% higher over the next month).
Heavy truck orders are spiking higher, and hiring has quietly picked back up after early year softness. Still, that is partially negated by increased inflation pressures. Risk remains heightened even though it certainly doesn't appear the market cared at all last week. We are now entering earnings season, and that might help to dictate what will happen next, assuming the market actually turns its attention from the war headlines. Many market measures at near-term extremes where a pause or pullback usually occurs, such buying surges have tended to bode well in the weeks and months to come more often than not. Some wiggle room to dip back down without really changing anything would be welcome so that this advance could take a short breath, but Mr. Market seldom does anything to help the majority of investors, and it could simply just continue to chug higher and leave all those questioning it in the dust.
Anticipated inflation spike
Aside from the war, the biggest nemesis to the stock markets of the world is inflation and subsequently higher interest rates. The first round of inflation data to incorporate the closure of the Strait of Hormuz revealed the biggest increase since Russia’s invasion of Ukraine four years ago. For specific categories, like gasoline, it was the largest monthly increase on record, with data going back to 1967. Economists, and probably anyone who had filled up a gas tank in the past month, anticipated the surge. In the first week of April the headline CPI (Consumer Price Index) was as expected due to this oil shock, but the core CPI was weaker than expected. This caused people to then look at PPI (Producer Prices Index) last week to see if the inflation translated across between the consumer prices and the producer prices. Strangely enough, due to all other inflation measurement data, PPI came in lower than forecasts.
Looking at oil futures curves and inflation expectations, the consensus appears to be that the inflation spike will be short-lived. That is our view as well. From an investment standpoint, we focus more on what our objective indicators are saying rather than what we think “could happen” in the future. The bottom line is that most top-level inflation data are not in high-risk zones for the broad U.S. stock market yet, but another month or two of higher inflation could push them over the top.
Disinflationary trend intact…for now
Perhaps the single biggest macro driver of the cyclical bull market that started in late 2022 is disinflation. The year/year change in the headline CPI peaked in June 2022. This CPI problem is what the Fed used to rachet up interest rates which sucked the oxygen out of the market and caused the post-COVID correction in 2022. It fell below its six-month average with the August CPI report, which came out in mid-September, pushing the indicator into its bullish zone a few weeks before the market bottomed. Despite a few hot CPI reports in early 2024 and early 2025, the indicator has remained bullish for nearly four years.
The logical question then becomes, “How did this disinflation happen?” I believe this is all about technology, super powerful software, and today’s engine- AI computing. In the Wall Street Journal, April 13th, just last week, on the front page there was an article titled, “AI Demand Outstrips Computing Capacity.” I believe this is the ultimate manifestation of global demand, on all levels, in all countries, of the voracious appetite for power needed to run these technological necessities. The media is continuously bantering about that AI is too greatly hyped and possibly not going to add to profitability at the rate necessary to justify its capital expenditure requirements. This could be true from the respect of how the financial benefit is to be measured. I believe that it is incredibly relevant, but for many, the need to invest in AI and the infrastructure related to it is based more on remaining competitive. If a company doesn’t embrace AI enhancements it possibly becomes non-competitive and suffers maybe being passed up in its industry. But if measures of benefit come from top line sales measurement, things could be measured wrong. Instead, such great productivity enhancement and margin expansion continues to evolve and grow, hence deflationary growth.
If everything is great, what gives with Consumer Confidence measures?
Thomas Lee of FundStrat Direct made a video the evening of April 13th addressing the huge disconnect between consumer confidence and the underlying strength of the US economy and the US equity markets. The first point is the opinion on inflation. There is HUGE difference of opinion between Democrats and Republicans. This isn’t a comment on party but rather I need to make a point that almost 70% of respondents are democrats and they are forecasting very high inflation of 4.8% and the republican opinion is 1%, hence the skewed poll reflects a much higher number than is the case.
The Consumer Confidence data is even more stark. In looking at this number, Consumer Confidence is at its worst measure ever in history! It is even worse than during recessions going all the way back to 1980. This makes one really question the validity of the study and the balance or equality of constituent voting on the measurement.
Separating the party lines shows the stark differences in opinion. This could be why the underlying economy and market are doing as well as they are, and the public opinion polls are showing a direct opposite. And remember, the public opinion is even more greatly expanded in this negative direction by the fact that the media hates the current administration, President Trump and everything he stands for.
Tax day has come and gone. Many people were upset with the capital gains taxes they owed particularly at a time when people are focused on something as unsavory as a war. But again, as Bespoke Group provided in their statistics, there have been 20 cases where there was a 10% spike in the S&P 500 over 11 days since 1953, and the average forward return over the subsequent 12 months was 17.14%. This one wasn’t 11 days, it was 13, and what a 13 it has been. Could Mr. Market take a breath? Maybe, but do you want to be anywhere else when earnings are coming in good and forecasts are again setting the bar once again higher?
If there is something that changes, we will be sure to let you know, but if you look back at the past couple of months of my musings, I have couched the market as more of a pause to refresh than the beginning of something really negative. This does not mean that I don’t foresee some type of digestion in late summer going into midterm elections, but for the most part, “stay long, or be wrong!”
- Ken South, Tower 68 Financial Advisors, Newport Beach
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