Rising geopolitical tensions, plus Retail Sales and bitcoin volatility
The Sandbox Daily (4.15.2024)
Welcome, Sandbox friends.
Today’s Daily discusses:
navigating market pullbacks amidst rising geopolitical tensions
Retail Sales rise +0.7% in March
tracking bitcoin volatility over time
Let’s dig in.
Markets in review
EQUITIES: Dow -0.65% | S&P 500 -1.20% | Russell 2000 -1.37% | Nasdaq 100 -1.65%
FIXED INCOME: Barclays Agg Bond -0.60% | High Yield -0.58% | 2yr UST 4.912% | 10yr UST 4.611%
COMMODITIES: Brent Crude -0.10% to $90.36/barrel. Gold +1.11% to $2,400.3/oz.
BITCOIN: -3.57% to $63,271
US DOLLAR INDEX: +0.16% to 106.204
CBOE EQUITY PUT/CALL RATIO: 0.68
VIX: +11.09% to 19.23
Quote of the day
“The road to success is always under construction.”
- Lily Tomlin
Navigating market pullbacks amidst rising geopolitical tensions
After a historically strong start to the year, markets have now pulled back ~3.5% to begin the 2nd quarter.
Concerns around geopolitical tensions in the Middle East, inflation, corporate earnings, and other issues have led to this market decline, pushing the VIX index of stock market volatility to its highest level since October 30th.
The latest development came over the weekend from an unprovoked attack by Iran on Israel, the 1st time a direct strike has occurred between the two nations.
In times of market stress, it’s important for investors to maintain perspective on the critical issues and not overreact to headlines. So, how can investors understand and weather this period of market volatility amidst rising geopolitical risks?
Two important points to consider here.
One, geopolitical headlines can be alarming to investors since they are unlike the typical flow of business and market news. These events are difficult to analyze and their outcomes are challenging to predict since they depend on the actions of individuals and groups with complex histories and motivations.
In respect to the impact on financial markets, history shows that while geopolitics can impact markets, the effects are typically short-lived.
Ryan Detrick put together this excellent catalogue of past geopolitical events dating back to World War II and the impact on S&P 500 forward returns. Most of these events did not have long-lasting effects on markets once the situation stabilized, unless the events caused/coincided with recessions.
Two, while today’s conflicts will be closely watched, investors ought to avoid passing judgment with their portfolios. After all, investors must keep the level of market volatility and decline in perspective as well.
While the recent -3.5% market decline is the largest since the start of the year, this follows a +10.6% total return in the 1st quarter. Since last October when the market began to rally, the S&P 500 has gained +28%, including dividends. Since the bear market bottom in 2022, the market has gained over +50%. So perhaps a pullback was warranted and maybe even welcomed by investors.
The chart below shows that the average year experiences an intra-year drop of ~14% and that this year’s pullback has been small by comparison.
In the long run, markets tend to recover and perform well primarily because business cycles are what matter over years and decades, despite the events that take place over weeks and months.
So while markets have struggled at the start of the 2nd quarter, staying level-headed and keeping these events in perspective are still the best ways to achieve long-term financial goals.
Source: YCharts, Ryan Detrick, J.P. Morgan Guide to the Markets, Clearnomics
Retail Sales rise +0.7% in March
Retail Sales – an important and closely watched economic metric that tracks consumer demand for goods – beat expectations in March, rising +0.7% for the month and came in more than double consensus expectations of 0.3%. Meanwhile, previous months were revised higher, fully erasing the weather-related drop that was reported at the start of the year.
These Retail Sales figures confirm the economy ended Q1 with strong consumer demand – partly explaining the elevated inflation we’ve seen – and adds to a trove of recent macro reports pulling the Federal Reserve away from rate cuts starting in June.
Sales rose in 9 of 13 major categories for the month, led by a robust +2.7% gain in non-store retailers (think internet and mail-order), followed by a +2.1% increase at gas stations, which rose largely due to higher gas prices in March. The largest decline in March was a -0.9% drop for autos.
The “Core Control” sales group, which strips out volatile categories such as autos, building materials, and gas stations — and is included in the formula to determine GDP — surged 1.1% in March (+1.4% including revisions to prior months). After looking weak in the 1st two months of 2024, these sales ended up increasing at a +2.2% annual rate in Q1 versus the Q4 average.
It’s important to remember that a key driver of overall spending is inflation.
While overall Retail Sales are up +3.6% in the last year and sit at a record high unadjusted for inflation, “real” (inflation-adjusted) Retail Sales are up just +0.2% in the last year and have remained stagnant for nearly two years after peaking in April 2022.
It has been 40+ years since the U.S. had an inflation problem, so investors should be aware that it can distort the data.
Source: Ned Davis Research, Bloomberg, CNBC, Mike Zaccardi, Charlie Bilello
Tracking bitcoin volatility over time
The bitcoin market has been maturing, prices and market cap have been rising, and more participants are trading and investing crypto than ever, which have all brought down the volatility.
With each subsequent cycle, the 90-day annualized volatility of bitcoin is hitting lower peaks (y-axis) as the size of the market expands (x-axis).
As bitcoin’s presence expands with the adoption of the newly launched suite of spot ETFs, expect the blue-chip cryptocurrency to continue maturing in the same way other asset classes and strategies have over time.
Source: Spectra Markets, WisdomTree, Bloomberg, Bitcoin Magazine
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.