Broker Check

Why Did Stocks Drop and What’s It Mean for Markets?

April 03, 2024

All the major indices dropped hard on Tuesday, and while the most cited reason was higher yields, that’s not the real reason the S&P 500 declined by more than 1% at the lows. 

Instead, the declines were driven by a four-way assault on the “bullish mantra” that’s pushed

 stocks higher since late October. Specifically, here are the four reasons stocks declined yesterday. 

Higher rates: This absolutely contributed as the 10-year yield hit a multi-month high of 4.40% and appears to be trying to break out of the “stock positive” 3.75%-4.25% trading range. The higher rates were driven by markets reducing expectations for a June rate cut (now just above 60%). 

Warning Signs from the Consumer: PVH (formerly Phillips-Van Heusen) is a clothing company that owns brands such as Tommy Hilfiger, Calvin Klein, and others. Their guidance was not the primary reason for the soft guidance. It was concerns about the consumer (and if the consumer restrains spending, hard landing concerns will rise sharply). 

Oil: Very quietly, oil has risen to multi-month highs on a combination of optimism towards Chinese growth and rising geopolitical tensions (Iran may execute a retaliatory strike on Israel following the Israeli strike in Syria, which killed a high-ranking Iranian official). Rising oil isn’t necessarily an inflation issue (the Fed will look past it) but it is a growth issue if oil prices stay elevated. 

Tech and health care weakness: Tesla posted horrible deliveries (worst in years), and while TSLA isn’t an AI company, it is a tangential tech company, and the weakness in EVs weighed on tech. Meanwhile, Medicare Advantage pricing didn’t increase, so managed care insurance companies such as Humana (a big and widely owned stock) got hit hard, which is a problem for margins. 

Each of these is an attack on a certain part of the bullish argument. Higher rates challenge the idea of looming Fed rate cuts, the horrid PVH guidance challenges the idea of a resilient economy, higher oil challenges the idea of falling inflation and solid growth, and the TSLA/EV results attack tech more broadly. 

So, what does this mean for markets? 

Importantly, none of these items materially alter the market narrative, and none of them are bearish game-changers. But with the S&P 500 trading above 21X earnings, none of them have to be gamechangers to cause a correction. 

The S&P 500 has risen more than 25% in five months, and it is trading at 21X earnings. It is entirely reasonable to expect a pullback, and if we get more headlines like we saw yesterday, we will absolutely get a 5%ish pull- back—although that’s a pullback that we’d likely look to buy as long as the four bullish factors are still in place. 

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