Stock Market Volatility: Potential Impact of Geopolitical Tensions and the Fed's Inflation Focus
AInvestThursday, Apr 4, 2024 5:30 pm ET
3min read

In recent days, the stock market has experienced a sharp rally, followed by a sudden sell-off late Thursday. This volatility has been driven by a combination of factors, including light trading volume, economic data, Federal Reserve comments, and geopolitical tensions. In this article, we will examine the growth potential and investment value of the market, by dissecting the influence of these factors and the resulting market dynamics.

The rally over the past two sessions was driven by weaker economic data as the ISM Services number came in below expectations, easing tensions around its impact on inflation. The move came on light trading volume which raised concerns about a potential sell-off at the end of the day ahead of tomorrows jobs report. The jobs number is expected to be strong, which could pressure rates as inflation concerns persist.

S&P Futures rallied to 5300 following the release of the Initial Claims which came in higher than expected. The idea that bad news was good helped provide the tailwind for the rally. The move though was on extremely light volume, primarily driven by Zero Days to Expiration trading. Equities were ripe for a reversal.

The initial selling pressure was light as the S&P attempted to hold the 5300 level. Comments from Chicago Fed President Austa intensified around 1:30 PM ET, after Chicago Fed President Austan Goolsbee pointed to inflation being the Feds biggest concern and that he needed to see more evidence that this was coming down. These comments echoed past statements by fellow members.

Selling pressure intensified when the S&P slipped below the 5295 area which was a key intraday support level. This selling intensified heading into the two oclock hour. S&P Futures were at 5284 at this time.

  • S&P Futures 5-minute chart showing the decline.

  • Comments from Minnesota Fed President Neel Kashkari led to further selling as he suggested the Fed would not move if inflation remained elevated. For some color, Kashkari tends to be one of the more aggressive Fed members in terms of commentary. He has a knack for lobbing headline bombs. His comment is basically what everyone is thinking, he is just the first to lay it out in public speaking. His comments contrast to statements made yesterday by Fed Chairman Jerome Powell. We would note that Kashkari is not a voting member.

    Selling started to intensify around this time which had markets pointing toward the Kashkari narrative as the impetus behind the selling. However, the decline in yields during this period raised questions as to the reason behind the sell-off. It did not match the hawkish Fed comments.

    This inconsistency was later attributed to the escalating tensions between Iran and Israel. Safe havens like treasuries, the dollar, bitcoin, and gold rallied. Oil broke out to session highs and pressed higher. Rates declined and the CME Fed Fund Futures saw a dovish tilt with expectations for a rate cut in June rising to 70% from 62%. None of this price action suggested that the Kashkari comments were behind the selling.

    The heavy selling observed during the decline contrasted with the light volume of the rally. This selling pressure was evident in the TICK data which reflected some of the heaviest selling we have seen this year.

  • TICK Data chart reflecting heavy selling by investors around the Israel/Iran headline. 

  • The lack of evidence of buyers looking to jump in on the dip can be attributed to the anticipation of tomorrow's jobs report and the looming threat of a military conflict.

    Investors are debating the potential impact of the jobs report on market momentum. While the Fed members have emphasized their primary concern for inflation rather than growth, a small miss in the report and a drop in hourly earnings could attract bullish sentiment. However, the uncertainty surrounding geopolitical events is likely to keep investors on the sidelines, making it difficult for bulls to regain momentum.

    The technical damage incurred during the sell-off and the resulting outflow of money is expected to keep investors cautious until earnings reports start rolling in. Although expectations for earnings are elevated, the resilience of corporate America could offer opportunities for investors.

  • S&P Futures break below the 20-day MA. 

  • In conclusion, the stock market is currently experiencing heightened volatility due to a combination of factors, including light trading volume, economic data, the Fed's stance on inflation, and geopolitical tensions. The absence of evidence that buyers are willing to step in, combined with the technical and fundamental damage incurred, suggests that bears may continue to control momentum in the near term. As we approach earnings season, investors will be closely watching for signs of resilience in the market and corporate America.

    This is hardly a call for the end of the bull market rally. We were simply in an area where this portion of the rally was fragile and subject to a correction. The impetus for the pullback, the anticipation of military action by Iran, remains a rumor. It is a threat and needs to be respected but we need to see how this plays out.

    In the meantime, as we suggested earlier this week, it is a good time to start putting together your shopping list for names you would like to own if we see a pullback. The potential for such a move lower in equities has picked up with this technical break and the heavy selling volume witnessed this afternoon. 


Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.