icon
icon
icon
icon
Upgrade
icon

Why did U.S. stocks plunge in early April

AInvestTuesday, Apr 23, 2024 11:25 am ET
4min read

The stock market has experienced a 5% pullback from its record high, driven by various factors such as sticky inflation, a patient Fed, geopolitical conflicts, and elevated valuations. The decline has been particularly sharp for the Nasdaq Composite, which has dropped nearly 8% and grown oversold. The sell off has led investors to search for reasons driving investors to the sidelines. There are a number of storylines factoring into the decline. 



  • Geopolitics- Irans attack on Israel can certainly be viewed as performative. Iran sent waves of drones and missiles at Israel. They appeared to be designed to fail. Yet, it still marked the first time Iran attacked Israel directly from its own soil since the 1979 Islamic Revolution. Israel promised to respond to Iran with its own attack. This drove participants into a defensive posture. Israels attack also appeared to be performative which was a relief for market participants. But the relief from what appeared to be both sides avoiding escalation was short-lived as the early Friday rally gave way to further selling.

  • Interest Rates- Economic data has been resilient to say the least. The latest Bank of America Fund Manager Survey showed investors moved into the camp of Soft Landing to No Landing which means investors are not expecting a recession. The strong economic data, especially on the inflation front, is raising doubt around the Feds ability to cut rates. The 10-year yield rallied to 4.69% this week, its highest level since mid-November. Fed members have also staged a notable change in direction as speakers have stated they do not see a need to alter rates given the recent economic data. These higher rates have weighed heavily on growth stocks and long-duration assets. These have been key drivers of equities over the past six months.

  • Earnings- The first quarter earnings reports have been solid. Companies have been beating top and bottom line expectations. However, the outlooks have been cautious. This started on April 12 when J.P. Morgan $JPM(JPM), Citigroup $C(C), and Wells Fargo $WFC(WFC) all beat top and bottom line expectations but were guarded in their expectations for the full year. Tech names in particular have raised red flags with semi cap chip giant Taiwan Semi $TSM(TSM) stating that it was seeing a slow down in demand in areas outside of AI. The Dutch semi cap equipment play ASML $ASML(ASML)guided its Q2 results well below expectations after missing bookings forecasts. Netflix $NFLX(NFLX) blew out its expectations but gave in line guidance and stated it would no longer provide subscriber numbers which markets took as a negative with the thought that growth has been saturated. All these stocks saw significant declines which led to profit-taking in other highflying names as fears of more warnings raised worries. Super Micro $SMCI(SMCI), which is a key Nvidia $NVDA(NVDA) vendor and AI chip play, announced its earnings report date but did not provide guidance for only the second time in the past 8 quarters when it announced its reporting date. Investors took this as a sign that the results will not be a big blow out like they have become accustomed to. 

  • Sentiment- The AAII sentiment data highlighted some of the issues the market was facing. Bulls have been running over 40% since early November. We saw a big pullback in bullish sentiment in the April 18 survey results. The Bull respondents were the lowest since November 2. This highlights the buyers strike that we are currently witnessing in equities. The numbers have not hit extremes one would like to see to mark a bottom in the current move.

  • Positioning- One of the primary drivers for the rally from November 2023 through March 2024 was under positioning by market participants. That has changed as more people have entered the market. This was evident in the Bank of America Fund Manager Survey which showed Cash positions had dropped to 4.2%. This is not a bearish extreme (that would be under 4%) but it does show there are not as many players involved to buy the dip.

  • Quiet-Period for Buybacks- Companies buying back shares have been a key driver in equity markets. Share buybacks were on pace for an all-time record. However, we are in a blackout phase for share buybacks as companies are not allowed to purchase around earnings reports. This has dried up a portion of liquidity in equities.

  • Technical Breakdown- April 1 marked an all-time high in the S&P. We have seen the index breakdown since hitting that level. We have highlighted some of the fundamental reasons for the slide. This has set up a break in the charts that is leading equities lower and driving bears to participate to the downside as momentum is in their favor. The S&P fell below its 20-day moving average on April 2. It failed to regain that level and would eventually tumble below its 50-day moving average on April 12 (the day banks reported earnings). The S&P has closed at a lower low everyday since April 12. The S&P is searching for support at the 5000 level (futures). This looms as an important level for equities to hold to stem the bleeding. The 20-weekly (5003) on the continuous adds to the potential support. 

  • Equities have fallen approximately 5% since April 1. The minimum pullback in a correction since the pandemic in 2020 has been 6%. This will keep investors tuned into signs of buyers willing to step in and stem the tide. A key aspect to the selling has been the response to earnings reports. That will be a key factor as we will receive over 30% of S&P company reports this week. This includes results from four of the magnificent Seven ($TSLA(TSLA), $MSFT(MSFT), $GOOGL(GOOGL), and $META(META)). In addition, we will get the latest read on the Feds top inflation tool, the PCE, on Friday as well as several bond auctions. The impact on yields will be closely monitored. 

    There is a large contingent of potential buyers sitting on the sidelines. They will search for signs of seller exhaustion and improved sentiment. If we start to see this, then it will be a good idea to start thumbing through that shopping list we told you to put together a few weeks ago!

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.