What's Up Danger?

The conflict in the Middle East rages on, despite some expectation that the U.S. was nearing an exit to the conflict. The White House, which has taken pride in being a pro-

business administration, seems destined to live dangerously when it comes to the conflict and financial markets. It's a holiday-shortened week, so the musings are a little limited on trivia, but loaded on market information. This week's musings are inspired by the 2018 song "What's Up Danger" which was a part of the soundtrack for movie "Spider-Man: Into The Spider-Verse." Here is some trivia about the song/movie:

• The song was written specifically for the movie, as were all of the songs on the soundtrack, in order to represent what a teen like Miles Morales would be listening to on their playlist. The song, along with "Sunflower" single, propelled the album to certified 3x platinum in sales. There have been more than 600 million audio streams for "What's Up Danger", which is considered blockbuster status.

• The movie, "Spider-Man: Into The Spider-Verse," earned more than $394 million at the box office on a budget of $90 million and won an Oscar for "Best Animated Feature Film" in 2019.

"What's up, danger?

Ayy, don't be a stranger

'Cause I like high chances that I might lose (lose)

I like it all on the edge just like you, ayy

I like tall buildings so I can leap off of 'em

I go hard wit' it no matter how dark it is

I'm insane but on my toes

I could keep the world balanced on my nose

I had a slumber party wit' all my foes

Now I wear them like a badge of honor on my clothes

If I'm crazy, I'm on my own

If I'm waitin', it's on my throne

If I sound lazy, just ignore my tone

'Cause I'm always gonna answer when you call my phone"

Here's what we've seen so far this week...

Go Hard Wit' It! The President was channeling his best Miles Morales this week during his press conference on Wednesday evening. After making public comments over the

weekend and early in the week that the U.S. involvement in Iran would be coming to an end soon, he notified the American people that there was at least another "two to three weeks" left in the campaign. That sent equity futures plummeting overnight. Thankfully, broad equity markets finished in the black on Thursday, likely due to considerable buying by pension funds during their rebalancing period. However, if we look at the over-reaction by investors so far in the context of previous wars/conflict, another two or three weeks would pale in comparison to historical U.S. involvement in conflicts overseas. Unless the current conflict spirals out of control and becomes years instead of months, investors should take a breath.

In fact, the current pullback is benign in contraction and more spread out in terms of time frame. Most bear markets begin with a quick 5% drawdown, that typically leads to

a full blown panic. That has not been the case this year. As of the end of March, the S&P 500 Index was down 9.1%, which took 35 days to achieve. In prior corrections that led to bear markets, the drop was 3.8x worse and the time it took to get there was twice as fast, on average. So, again, it's a little early to hit the panic button until more information about the conflict arises or markets plummet.

Leaping Off Of Tall Buildings?  Spider-man is notorious for hanging onto the tops of skyscrapers - something investors do not like to imitate when it comes to the markets.

Despite the prospect of another downturn heading into the close of Thursday, which would have been 5 Thursdays in a row, markets rallied off the lows and finished in the black overall. That being said, the ultimate low for equities may not be in as the four signs of a market bottom tend include another test of the low. So far, we've been oversold from a technical stand point, rallied off the bottom this week (as the S&P 500 will finish higher than 3% this week), and we are close to seeing the first Zweig Breadth Thrust in some time. All this could be a signal of a bottom having been put in for equities.

Equity markets bounced on the final day of March by more than 2% and by almost another 1% on the first day of April. The move was significant enough for the Tick Index

on the NYSE to spike to 2,329 stocks rising at the same time, which was an all-time high. The previous record was 2,200 set in April of last year when markets began to recover off the tariff-driven lows. Furthermore, the S&P saw more than 75% of its components ending April 1st higher. In other words, the U.S. stock market saw its most aggressive buying on a single day in years. Headlines regarding the Iranian conflict could force equities to test lows, but discounting the spike higher this week is not a wise decision.

What's Up Danger?  While investors have been solely focused on the Iranian conflict and the issues around private credit, S&P companies just quietly turned in a strong

batch of Q4 corporate earnings. Companies in the S&P were up 14% in earnings growth, which is the 5th straight quarter of double-digit growth. That doesn't exactly sound like an economy rolling over. With regard to Q1, 51 companies from the S&P 500 issued positive EPS guidance, which is above the 5-year average. There will likely be some effects on corporate earnings, especially with regard to transportation costs, but that may depend upon how quickly the Iranian conflict can come to a close.

The good news is that we typically see strong returns moving forward when markets make the kind of move made this week. After a 2.5% gain, like the one seen Tuesday,

the S&P 500 Index is higher 6 months later. Over the last 30 periods when this kind of one-day rally occurred, the S&P gained an average of 18.4% over the following 6 months with an average positivity rate of 83%. While the jury is still out on the conclusion of the Iranian conflict, some positive news on the private credit front emerged this week. Dallas Federal Reserve President Logan spoke this week and addressed the private credit situation by stating, "Private credit structures limit ability to create larger problems." That statement, plus the fact that private credit stocks were off their lows this week, could help heal some of the fractures caused by private credit in the financial sector. While it's too early to declare victory, we could be seeing the light at the end of the tunnel, with perhaps better days ahead.

Here's Miles showing the world what’s up danger...

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