05/20/2024 Market Strategy
- May 20, 2024
What a Difference a Day Can Make
Last Week’s CPI Report Brought Relief After the Prior Day’s PPI Figures Caused Concern
Key Takeaways
- With 93% (466 firms) of the companies in the S&P 500 index having reported Q1 results, earnings are exceeding expectations. Profits are up 5.3% overall on the back of 3.7% revenue growth. Prior to the start of the season, Bloomberg put bottom-up estimates of Q1 earnings growth at 3.9%.
- Eight of the 11 sectors are showing positive earnings growth, with six up double-digit rates. These include communication services (+34%), consumer discretionary (+32%), utilities (+31%), information technology (+12%), financials (+11%) and real estate (+11%).
- We review key factors that have supported the current rally in stocks.
- Last week’s consumer price index data showed inflation cooling somewhat, but still running well above the Fed’s target. Meanwhile, other data, including retail sales and the leading index, point to a possible economic slowing in April.
Better than expected inflation numbers in the April consumer price index report released last week reinvigorated and emboldened expectations among some investors for a rate cut sooner than later by the Fed. The retail sales data and the markets’ reactions also rekindled recession worries from some corners of the market that continue to expect Fed policy will hold tight too long.
Stock prices advanced pushing four of six widely followed benchmarks to record highs over the course of last week. The Dow closed on Friday at a record level of 40,003.59 while the S&P 500, the S&P 600 (small caps), and the NASDAQ Composite closed at record highs earlier in the week on Wednesday. The Dow Industrials closed higher for a fifth week in a row while the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small caps), the Russell 2000, and the Nasdaq Composite (over 40% in tech and tech related stocks) closed higher for a fourth week straight.
Bond yields, which had jumped higher after Tuesday’s Producer Price Index data surprised to the upside, fell after CPI numbers on Wednesday came in better than expected signaling an ebbing in the pace of inflation.
In our view the mixed inflation data for April represented in the PPI and CPI numbers is not atypical...
In our view the mixed inflation data for April represented in the PPI and CPI numbers is not atypical when a Fed funds rate hike cycle to curb undesirable levels of inflation is in progress—and particularly in a tightening cycle that has been ongoing for over two years.
There’s a big difference between slamming on the breaks and pumping them.
We view the recent drop in consumer sentiment surveys as not surprising since Fed policy continues to reflect concern about cutting rates too soon which could reignite inflationary pressures and keep the inflation rate elevated for longer. A rise in late payments on loans and an increase in credit card balances tend to be part and parcel of a transitional environment when the Fed is working at slowing the pace of inflation from undesirable levels.
The good news to us is that the Fed this rate hike cycle appears to persist in being highly sensitive in practicing its mandate in a manner which has avoided to date and could yet avoid causing the economy to slip into a recession. For all the bounce and grind the day to day can bring to headlines and market volatility, there remains overall in our view a resilience within the economy evidenced in business, the consumer, and job postings even as the Fed remains vigilant towards inflation.
Question of the week
With the Dow closing at its latest record high on Friday and the S&P 500 having closed at its 23rd record high of the year on Wednesday, we’ve been asked what is the likely cause of the latest moves in the stock market?
Among the many factors that have brought the equity markets to current levels in our view:
- Improved fundamentals evidenced in business, the consumer, job creation and the degree of success the Fed has had thus far in curbing the pace of inflation.
- Innovation that has increased efficiencies across the sectors for business and the consumer.
- Increasingly a need by investors to invest for retirement purposes at a time when it is projected that social security benefits could be at risk of being reduced in the not too distant future.
- A broadening of the rally across sectors, market capitalizations, style (growth vs. value) since late October 2024
We remain positive on equities and continue to see fixed income securities as complimentary to stocks in providing portfolio diversification.
Some near term profit-taking in the day to day action of the market particularly in segments of the market that have had exceptional run-ups since last year into this year continues to appear to us quite normal. Such activity combined with a process of rebalancing and rotation into other segments of the stock market in our view can be healthy and should contribute to the broadening of the markets’ progress from last year through this year.
Near term volatility could in our view continue to present opportunity for investors to “catch babies that get thrown out with the bath water” in periods of market down drafts as the market digests levels of uncertainty that are not uncommon to times of transition in monetary policy like these and in periods of rising geopolitical risk.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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