Investors may have celebrated the end of high inflation too soon. The CPI report shows that inflation is picking up, thus moving the start date of the Fed’s rate cuts. This causes the S&P 500 (SPY) to have come off recent highs. This raises questions like: How many more negatives might we see? And when will the bull market get back on track? Steve Reitmeister, a 44-year investing veteran, shares his answers to these questions in this timely commentary that includes a preview of his top picks to stay ahead of the pack. He continues reading below for more information.
High inflation refuses to “go peacefully into the night“.
Instead, the most recent consumer price index report was too hot, which severely downgraded the chances of a rate cut coming in June or July. Bond rates rose and stock prices fell on Wednesday.
Thursday’s PPI report was a bit more subdued and helped calm the mood. But this clouds the market outlook.
So, we’ll do our best to shed some light on our path from here in today’s commentary.
Comment on the market
April started with a slight sell-off, which seems quite natural given the rapid pace of earnings in the first quarter. Then, just as stocks were climbing back toward highs, we were presented with an unwelcome Consumer Price Index report on Wednesday that prompted investors to hit the sell button once again.
Unfortunately, year-over-year inflation increased from 3.2% last month to 3.5% this time. Yes, this is the wrong direction as we want to continue on our downward path towards the Fed’s target of 2%.
We all know that inflation rarely moves in a straight line. But this wasn’t the first higher-than-expected inflation report… but it was certainly the most glaring negative that investors couldn’t ignore.
Nerds out there (like me) will notice that Sticky Inflation readings have gotten even worse. That reading rose to 5% based on the monthly change from the previous 4%. There is simply no way the Fed could look at this recent data and decide to lower rates in May… June… and probably not July.
The investor world certainly agrees with this idea, given the seismic movements in the bond market. Most notable was the 10-year Treasury rate rising to nearly 4.6% on Wednesday. Things cooled down on Thursday, given the “slightly” better than expected PPI reading.
This significantly changes expectations for the timing of the Fed’s first rate cut. A month ago there was a 72% chance that this would happen in June. It has now dropped to 22%.
The move to July was seen as almost a landslide with a 90% chance of lower rates. This is now a coin flip with only 49% probability.
Finally, we see that the September meeting will have a 70% chance of lower rates. All of this indicates that investors are moving beyond May 1stst Testimonies nourished under the microscope in search of even the smallest clues of what will come next.
Long story short, I think it’s almost crazy for investors to expect new highs for stocks until inflation is better hidden and certainty about the timing of the first rate cut increases. This indicates that the recent high of 5,265 for the S&P 500 (SPY) is the upper limit of the current trading range.
The bottom of this range is a little less clear. Will investors consolidate more, slightly below recent levels? Thursday’s strong rebound appears to point in that direction. But the longer things go on without a resolution to the matter, the more we could drop below the 50-day moving average at 5,105 and perhaps give 5,000 a serious test.
If this scares you, then I might advise you to put your money in the bank rather than the stock market.
The only way to enjoy the reward of a 27% gain for the S&P 500 since the end of October is to take on the risk that comes from mild pullbacks and more severe corrections from time to time. This means that testing 5,000 or even less would be a yawn in the history of stock market movements that has improved our net worth considerably over the past few months… years… decades… generations… and so on.
My trading plan is to remain bullish. Just have a better eye towards the value of your positions. If you wouldn’t buy any more shares of that stock today…then maybe it’s time to sell and add new stocks that you think have better upside potential.
This also requires a “buy on dip” mentality, as there will likely be more volatility and rough sessions ahead. Those are the times to step in and add shares of your favorite stocks.
All in all, we are returning to a more normal bull market. Where 2 steps forward and 1 step back are just part of the dance. So, one more reason to find the rhythm and dance together.
What to do next?
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This is all based on my 43 years of investing experience watching bull markets… bear markets… and everything in between.
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Wishing you a world of successful investing!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO of StockNews.com and editor of Reitmeister Total Return
SPY shares traded at $515.01 per share on Friday morning, down $2.99 (-0.58%). Year to date, SPY has gained 8.69%, compared to a % gain in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to StockNews audiences as “Reity.” He is not only the CEO of the company, but also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Find out more about Reity’s background, along with links to her most recent articles and headline picks.
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