06/17/2024 Market Strategy
How High the Moon?
Last week marked the 20-month anniversary of the bull market
Key Takeaways
- Information technology stocks rose 6.4% last week, pulling the S&P 500 index 1.6% higher, and the Nasdaq Composite up by 3.2%.
- Last week’s consumer price index data showed a cooling in inflation at both the headline and core rates in May. This was followed by softer-than-expected data on producer prices for the same month, suggesting that price pressures may once again be easing.
- With the FOMC meeting, May CPI report, and earnings season in the rearview mirror, investors will likely focus in this holiday-abridged week on economic data and company specific news for clues as to the direction the markets will take in the near term.
The S&P 500 and the NASDAQ Composite posted their latest record highs last week driven by economic data that revived expectations for a Fed rate cut sooner than later from some investors and pushed technology stocks higher driven by fund flows, earnings results, and prospects for innovation to carry the sector higher.
While the Federal Reserve in its FOMC meeting last week maintained a wait and see approach as to when and if it will cut its benchmark rate this year a moderation in the inflation rate from the latest CPI and PPI data raised market participant appetite for risk assets that pushed stocks higher, raised bond prices and lowered bond yields. The CPI index measured inflation running at its lowest pace in three years.
While the moderation in the pace of inflation raised sentiment for risk assets particularly for large cap technology and tech-related names last week other investors expressed concerns that the Fed might cut rates just once or not at all. This rekindled recession worries among some managers and pundits.
Earnings Wrapped Up
With 499 companies in the S&P 500 having reported results for Q1 eight sectors delivered positive results with six (communications services 41.3%, utilities 30.5%, consumer discretionary 29.7%, information technology 25.6%, financials 11.3% and real estate 10.5%) of those eight reporting double digit earnings growth in the year over year period. Just three sectors reported negative earnings growth of which all three showed double digit declines (energy -25.7%, health care -25.6% and materials -21.5%).
Overall the S&P 500 showed earnings growth of 7.9% on the back of 4.2% revenue growth exceeding expectations at the start of the Q1 season for earnings growth of 3.9%.
With just one company (belonging to the consumer staples sector) left to report for Q1 investors will likely focus in this holidayabridged week on economic data and company specific news for clues as to the direction the markets will take in the near term.
Focus on the Fed
In our view the good news for US investors in terms of the Fed is that it has been remarkably sensitive in applying its mandate to curb inflation this rate hike cycle and so far been able to avoid pushing the economy into a recession. The economy, business, the consumer and job growth persist in showing signs of resilience in data and earnings results released through the last week.
While there is evidence of some slowing it should come as no surprise considering the Fed’s 11 rate hikes and eight pauses since March of 2022.
The operative word in our view remains “resilience” with the Fed still on pause and inflation still stickier than desired keeping the Fed’s 2% inflation target elusive for now.
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 should be expected and 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.
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