US stocks closed in the red on Monday, extending the losses from the previous week, with the Dow Jones down 248 points, the S&P 500 falling 1.2% and the Nasdaq slipping by 1.8%.
Investors were digesting March Retail sales that rose more than expected, suggesting interest rates may stay steady for longer than anticipated.
Earnings season entered its 2nd week, with Goldman Sachs jumping 2.9% after reporting a 28% jump in Q1 profit.
Charles Schwab gained 1.7% after earnings and revenue slightly beat estimates, while JPMorgan edged higher.
Conversely, Tesla dropped 5.6% after news that the company would lay off more than 10% of its global workforce.
Last Tuesday (here) we looked at this chart and talked about the "set up for a correction in stocks”…
We had been watching the associated trendline for the better part of the past two months - a nearly perfect 45 degree angle ascent of the world's benchmark stock market (proxy for economic and geopolitical health and outlook).
We talked about the technical reversal signal that materialised (the outside day) in the S&P futures, Russell 2000 futures, Dow futures and the German Dax futures, and we talked about the breakdown of the trendline on April 4th.
With that, here's the up-to-date look at this chart …
As you can see, the break of the line did indeed start a correction in stocks. It's underway. As of yesterday's close, the;
S&P futures are down 4.5% from the (record) highs of early this month.
Nasdaq futures are down 4.6%.
Dow futures are down 6%.
Russell futures (small caps) are down 8.4% from peak to trough, over just two weeks.
So, what's the driver? Is it the Fed's lack of confidence in the disinflation trend? Or is it geopolitical threats that markets have been (mostly) ignoring, but have now become the central focus?
It looks like the latter.
If we look back to the reversal signal in stocks. It happened on April 1st - that was market reaction to Israel's attack on the Iranian consulate in Syria.
A few days later, the trendline in stocks gave way when a flurry of geopolitical headlines hit, ranging from the threat of U.S./Israel policy change to U.S./Taiwan policy confusion, to provocative (to Russia) Ukraine/NATO relations.
Then later that day, this headline (below) hit, warning of a retaliatory attack on Israel from Iran.
That brings us to the events of this past weekend, and the market behaviour today.
As we discussed in my April 5 note (here), with these events, the world became more dangerous, and with that, rate cut timing becomes less important for markets. The dominant theme for markets for now is risk aversion, and capital flows will be driven by whether or not there is escalation (in this case, a response by Israel to Iranian attacks over the past weekend).
Where does capital flow in times of global risk aversion?
U.S. Treasuries (still).
Gold.
The Dollar.
And the big tech oligopoly has also proven to be a favoured safe-haven in the crises of recent years, and likely even more so in the age of generative AI.
De-escalation should trigger a very healthy appetite to buy into the correction in stocks.