Weekly Recap:

by Michael Reinking, CFA & Eric Criscuolo

Today’s MAC Desk note is brought to you by the letter V.

What do you get when you begin a war with Iran and then wait seven weeks? Record highs for the S&P 500, apparently.

We started last week with President Trump threatening to obliterate Iran if a peace deal wasn’t reached and Iran responding by threatening to send the Middle East into the darkness. But out of that darkness, a last-minute, 15-day ceasefire emerged. That led us, in last Friday’s write-up, to note the latest in a recent string of anniversaries. This ceasefire announcement by Trump coincided with the 1-year anniversary of the tariff policy pivot that triggered an historic 10% intraday reversal in the S&P 500.

The S&P had fallen for five straight weeks, starting with the week the Iran war began. March 30 would mark the bottom. The one-month decline starting at the end of February saw equity correlations at the index level move toward one with most major indexes and size/growth/value factors down 7-8%.

Sector-wise, Healthcare and Industrials were the biggest decliners. Software actually bounced off lows in late February before a reversal wiped away the gains.

Since the lows on March 30, headlines and expectations turned more optimistic. Since then- a whole two-ish weeks- the S&P made it all back, and then some. 7000 had been a hard ceiling for the index since January, unable to break above it. On Wednesday, we did, setting all-time closing and intraday highs.

Tech, especially the mega caps and semiconductor group, has led the way higher. Most recently, the software group, which was under assault well before the missiles started flying in Iran, has started to bounce again off its lows. Consumer Discretionary saw big outperformance versus the defensive Staples. The Dow Transports got a major push from Avis’s 200% gain since March, but Airlines and freight have been relatively solid. The private capital asset managers that have been under pressure, like Blue Owl and Apollo, are up around 15%. Energy stands alone, swinging from top to bottom on the back of oil’s moves.  

Thematic, higher-risk and retail favorites have been a big part of the recovery as well. Most of the ten or so quantum computing stocks that we track are up 20-50% since the beginning of the month. Same with the neo cloud providers and bitcoin miners pivoting to high performance data centers.

Stocks opened this week after negotiations between the US and Iran over the weekend. The see-saw of headlines continued, with some articles touting the potential of continued negotiations while others discussed new options for US military strikes. Commentary was leaning more and more towards resolution though, pushing equities to their ATH on Wednesday and then again Thursday. A ceasefire between Israel and Lebanon was announced, then more pieces fell into place: Axios reported that the US was considering releasing $20 billion of Iran’s frozen funds in return for Iran giving up its enriched nuclear stockpile. Then, right before Friday’s open, Iran’s Foreign Minister Araghchi posted that in line with the ceasefire in Lebanon, “the passage for all commercial vessels through Strait of Hormuz is declared completely open for the remaining period of ceasefire…”

Equities ripped. 7000 gave way to 7100 as oil fell out of bed, down ~10%. Yields followed crude, with the curve down 7-10bp out to the 10y. It was also an options expiration and all of those expiring positions was adjusted and reloaded as these updates hit the tape. As the Closing Bell rang, the S&P 500 added 5% this week, with mega cap strength lifting the market-weight index above the equal-weight. Growth beat Value across market caps by 400-600bps.

Tech led with software flying higher. The IGV ETF posted its best week since 2000 and doubled-up semis. Consumer Discretionary outperformed the Defensive Staples by 700bp. A big part of that was Tesla’s 15% gain. Travel and leisure names have seen strong bounces. This afternoon, the first cruise ship was reported to have moved through the Strait since the conflict began. The ship was passengerless, however. I can't imagine being a passenger on that ship and hearing the Captain saying on the intercom, "Good morning folks. Guess what we're doing today?" Energy was the laggard, but its decline feels a bit moderate. The defensive Utilities also pulled back, even with Friday’s drop in yields. 

A slew of market watchers released interesting statistics that put this rally in historical context. One of our favorites came from Warren Pies of 3Fourteen Research, who highlighted that the nearly 10% rally in the 10 days ending Tuesday, ranked in the 99.7th percentile of all 10-day returns going back to 1950. He also highlighted that the forward return profiles of the 20 instances that exceeded this most recent episode were generally pretty positive. However, all but two of those rallies ended <10% below all-time highs, making this situation unique.

Warren’s feed was must-read this week. In another post, he noted that of the 792 new all-time highs since 1998 (crazy stat right there on its own), Wednesday’s had the fewest number of stocks reaching a 52-week high (2.4%). Pulling back a bit more, seven of the 12 narrowest highs have occurred in the past two years.

Andrew Thrasher from Financial Enhancement Group provided more evidence to the uniqueness of the rally. With the S&P’s RSI reading on the cusp of 70, there were only 2 prior times since 1980 that the S&P’s RSI went from under 30 to over 70 in 15 days.

The breakneck recoveries after the COVID and the tariff selloffs, coming during the larger, roughly 100% gain since October 2022 have conditioned investors to stay in the market, buy the dip and respect the FOMO. This time around, expectations were tested but generally fell into the camp that the Iran situation would move closer to normalcy, rather than explode kinetically. Investors were also hedged for left-tail risk. We previously noted volatility compression across equities and treasuries, allowing systematic programs to reengage.

Geopolitics will remain a driving factor for markets as the Iran situation continues to evolve. Q1 earnings, however, is bringing a fundamental perspective to what has been a very macro focused market. So far the major banks have reported solid results, haven’t waived any red flags on consumer health or credit issues and are optimistic on the economy- providing further support for equities. Management commentary highlights a resilient backdrop: 

Trucker J.B. Hunt provided an optimistic take on the economy. Management highlighted improving dynamics in trucking as capacity has been reduced given the recent regulations which is helping the group broadly. PPG pre-announced positive earnings, calling out strength in aerospace. The coatings company is the most recent chemical company to implement price increases of up to 20% as input and logistics costs ratcheted higher.  That will remain an important development to monitor.

While good vibes are outweighing bad, the situation remains dynamic and animal spirits could turn quickly. In his latest comments President Trump said that Iran’s uranium will be brought to the US and removing it won’t involve ground troops. He, along with other media outlets have said the US and Iran are meeting this weekend, or maybe Monday. Meanwhile, Iran had some Slow Your Roll comments, with officials calling out significant differences between the two sides. Iran’s Foreign Minster added that Iran doesn’t “support what the US officials and their media are proposing regarding the Iranian nuclear dossier”. Stay tuned.

It was a somewhat quieter week of economic data which has been secondary to the geopolitical headlines anyway. This is largely due to the fact that the length and ultimate outcome of Iran situation have the potential to greatly impact the environment going forward. We have laid out the BI/AI (before/after Iran) framework, and we are now starting to see some of the AI data. Similar to the commentary heard on company conference calls this week’s data continues to point to a resilient backdrop.

In theory PPI was the main event on the eco calendar. It came in surprisingly cool on both headline and core. Final Demand Goods jumped 1.6% but most of that was the 8.5% jump in energy, which was expected. Ex-energy and food, final demand increased 0.2%. Meanwhile Services was unchanged in the month, falling from +0.3% in February. The annual reading, which has been trending higher recently hit 4%, the highest level since February 2023.

The claims data continued to hold up well with initial claims falling back to the low 200’s. Continuing claims did tick up but remain ~1.8ml. 

The survey data also pointed to a resilient backdrop. The Beige book showed a slight to modest increase in economic activity in 8 of 12 districts. Most Districts described labor demand as stable, with low turnover, minimal layoffs, and hiring mostly for replacement. This week Empire and Philly manufacturing were also released, both showing some improvement, with a pickup in new orders the forward expectations were not quite as strong. Not surprisingly the prices components increased as well, particularly prices paid, which suggests that either margin compression or ultimate pass through is coming both of which will be key topics during earnings season. 

Treasury yields ended the week down some steepening of the curve. The bulk of that move happened today. 

The USD index reversed most of the Iran move higher over the last two weeks. It broke below its 200d ma but has been hovering right ~$98 in the middle of the range it has been in for much of the last year.

The Q1 earnings train barrels ahead. A broader set of companies will begin to report, including 3M, Proctor and Gamble, defense contractors, IBM, Tesla, Blackstone, Vertiv, Intel and American Express. SAP and ServiceNow will also report and should see a lot of attention as the market looks to gain insight into AI disruption in the software space. Flash PMIs and Retail sales will headline an otherwise light economic calendar. The Fed goes into their blackout period this weekend, leading into the last Fed meeting with Jerome Powell as Chair- unless he stays in place as Chair pro-tempore if Trump’s nominee Kevin Warsh fails to get confirmed by the Senate in time. But Trump just threatened to fire Powell, again, if he stays on after his regular term ends. The Senate Banking Committee has scheduled a confirmation hearing for Warsh on April 21. You can think about all this as you sit back and watch the NBA and NHL playoffs. Go Knicks!      

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