Stock Traders Buckle Up for Quarter-End Volatility: Markets Wrap

(Bloomberg) — A renewed bout of volatility gripped stocks in the final stretch of a quarter that saw the market surge almost 10%, with many institutional investors potentially rebalancing their portfolios.

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Just a day after the S&P 500 quickly reversed course in last hour of trading, the benchmark struggled to hold on to its gains. The gauge traded well off session highs as some of the names that have powered the bull run came under pressure, with Nvidia Corp. leading losses in megacaps. The Nasdaq 100 wavered after an advance that approached 1%. Treasuries rose.

Wall Street geared up for heightened swings, with institutional investors checking their exposures at the end of the quarter to make sure they meet strict allocation limits between equities and bonds, as well as between domestic and international shares.

With stocks set to cap another strong quarter, pension funds are likely to sell an estimated $32 billion in equities to rebalance their positions, according to Goldman Sachs Group Inc. After the S&P 500 soared about 25% since late October, many have flagged concern that positioning is stretched and stocks are more vulnerable to short-term profit taking.

“We saw some oddly timed action in the stock market yesterday,” said Matt Maley at Miller Tabak + Co. “So, maybe the quarterly rebalancing that everybody talks about each quarter, but rarely has much impact, just might create some more interesting moves before the week (and quarter) are over.”

Traders also awaited Federal Reserve Governor Christopher Waller’s remarks at an event after the close.

To Thierry Wizman at Macquarie, Waller may offer a “rebuke of Jay Powell’s dovishness.”

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“While not dismissing the prospect of a June cut, Waller may point to sturdy US aggregate demand and ‘sticky’ inflation in the January and February data to justify fewer rate cuts than the median ‘dots’ imply,” Wizman noted.

Gentle rate cuts could create a mildly supportive environment for risk assets — which could also be helped by a high level of cash on the sidelines, according to Kristina Hooper at Invesco.

“For those who believe that such cuts are already priced into stocks and fixed income, I would argue that there are other catalysts” Hooper said. “Keep in mind there is a high level of cash sitting on the sidelines, some of which could rotate into equities and fixed income, especially if rates begin to fall and/or more investors develop a fear of missing out.”

To illustrate, she cited the fact that money-market assets peaked in the fourth quarter of 2008 before dropping significantly.

“It seems no coincidence that cash started to move off the sidelines just as stocks began a strong and lengthy multi-year rally in March of 2009,” she concluded.

A blistering five-month rally in US equities has seen valuations soar, but plenty of corners in the S&P 500 are still historically cheap.

At the sector level, eight of 11 groups trade at a discount compared to pre-pandemic levels — while only technology, materials, and industrials are trading at a premium, according to Bloomberg Intelligence data.

Meanwhile, nearly three fourths of the gauge trade below its capitalization-weighted price-to-book ratio — a measure that compares market capitalization to book value, used to find undervalued pockets of the market, BI’s analysis showed. A similar share of companies, 71%, carry forward-price-to earnings multiples beneath the index level, with roughly half below their average before Covid.

“Multiples for the next year appear much loftier than they seem for the S&P 500 index, distorted by analysts’ conservative forecasts for an earnings recovery from the 2022-2023 profit recession,” said a BI team led by Gina Martin Adams.

Trailing 12-month S&P 500 earnings per share contracted 13% from the March 2022 high — well short of the median 25.8% peak-to-trough drop in economic contractions since the 1969-1970 recession, and 16.8% excluding the 2007-09 and 2020 extreme outliers, the BI strategists noted. Only two recessions — 1980 and 1969-1970 — had shallower drops in earnings.

S&P 500 EPS on median jumped 15.6% in the first 12 months after each recessionary trough since 1969 (excluding 2007-09 and 2020), the analysis showed.

“Perhaps reflecting the smaller-than-usual drop that occurred in this cycle, consensus forecasts a mere 11.1% rise in earnings over the next year,” the strategists concluded.

Corporate Highlights:

• Former president Donald Trump’s Trump Media & Technology Group Corp. is powering higher after a stellar Nasdaq debut.

• Merck & Co. won US approval for a new treatment for a rare, dangerous form of high blood pressure that’s expected to be among the company’s hits as sales from successful older drugs begin fading later this decade.

• Robinhood Markets Inc., best known for offering commission-free trading, is rolling out a credit card to US consumers as it looks to become a broader financial-services company.

• Carnival Corp. slightly raised its outlook for 2024 amid record setting demand for cruises. However, the company also citied a negative impact related to the collapse of Francis Scott Key Bridge in Baltimore and is continuing to feel the effects of conflict in the Red Sea region.

• Reddit Inc. slipped after Hedgeye Risk Management released a report adding it as a short idea and saying it should trade about 50% below current levels.

• Fisker Inc. dramatically reduced the price of the Ocean sport utility vehicle — its only model — as the electric-car maker struggles to stay in business.

• Gamestop Corp. reported adjusted earnings per share and net sales that missed the average analyst estimate.

• Altimmune Inc.’s experimental weight-loss drug minimized muscle decline in a mid-stage trial, a sign that it can address a problem obesity drugmakers have been racing to solve. The company ended a separate drug development program in hepatitis.

Key events this week:

• UK GDP revision, Thursday

• US University of Michigan consumer sentiment, initial jobless claims, GDP, Thursday

• Japan unemployment, Tokyo CPI, industrial production, retail sales, Friday

• US personal income and spending, PCE deflator, Friday

• Good Friday. Exchanges closed in US and many other countries in observance of holiday. US federal government is open.

• San Francisco Fed President Mary Daly speaks, Friday

• Fed Chair Jerome Powell speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.3% as of 12:46 p.m. New York time

• The Nasdaq 100 was little changed

• The Dow Jones Industrial Average rose 0.6%

• The Stoxx Europe 600 rose 0.1%

• The MSCI World index rose 0.2%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.0824

• The British pound was unchanged at $1.2628

• The Japanese yen rose 0.2% to 151.32 per dollar

Cryptocurrencies

• Bitcoin fell 1% to $69,099.07

• Ether fell 1.8% to $3,512.9

Bonds

• The yield on 10-year Treasuries declined four basis points to 4.19%

• Germany’s 10-year yield declined six basis points to 2.29%

• Britain’s 10-year yield declined four basis points to 3.93%

Commodities

• West Texas Intermediate crude fell 0.5% to $81.20 a barrel

• Spot gold rose 0.6% to $2,191.04 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Jan-Patrick Barnert, Michael Msika and Alexandra Semenova.

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