Relief Rally Stalls Amid Iran De-escalation Uncertainty, Underlying Strength Persists
The market's recent relief rally, initially spurred by optimism for de-escalation in the Iran conflict, appears to be losing momentum as uncertainty persists. This comes at the start of a new quarter and month, with investors closely monitoring geopolitical developments and their potential impact on global markets.
Despite the slowdown, major indices saw gains, with the Dow Jones Industrial Average rising 0.5%, the NASDAQ Composite up 1%, and the S&P 500 increasing approximately 0.67%, marking a two-day gain of 3.63%. Bond yields for the 10-year and 30-year T-notes each saw a one-basis-point increase to 4.90%, while the US dollar index marginally declined. The energy sector, contrasting its nearly 30% year-to-date performance, fell 3.8% for the day amidst fluctuating oil prices and ongoing inflation concerns. The Federal Reserve is widely expected to maintain current interest rates, though the bond market may be preemptively adjusting for future rate movements.
Analysts note the market is significantly oversold, with the S&P 500 achieving its best two-day rally since April or May of the previous year. Beneath the surface, market breadth indicators suggest potential underlying strength despite recent price declines. Sentiment remains overwhelmingly bearish, evidenced by hedge fund selling and high put-to-call ratios—often considered a contrarian signal for a market rebound. Furthermore, corporate earnings estimates for the S&P 500 are on the rise, and profit margins are at all-time highs of 15% (compared to 12% in 2019), providing fundamental support for a bull market.
Historically, midterm election years are characterized by volatility but are frequently followed by substantial market rebounds. The market has demonstrated resilience against negative news, though volatility in oil markets remains a concern. A critical technical level for the S&P 500 is its 200-day moving average, which currently acts as a resistance point. The VIX, a measure of market volatility, closed above 30 for two consecutive days, indicating heightened investor anxiety.
Sector-wise, Industrials, Technology, and Consumer Discretionary recorded their best two-day performance since April or May of the previous year. Individual stock movements included Intel (INTC) up 8.5%, Caterpillar (CAT) up 3%, and Boeing (BA) up 4%. Conversely, Chevron (CVX) declined 4.5%, and Nike (NKE) fell 15% (down 30% year-to-date). The 2-year Treasury yield rose to about 3.8%, and the 10-year Treasury yield reached 4.4%. The average 30-year fixed mortgage rate stood at 6.47%, increasing half a point in three weeks. Bitcoin also saw gains in March.
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