Investors may have celebrated the end of high inflation too early. The CPI report shows that inflation is rising, delaying the start of the Fed’s rate cuts. This is causing the S&P 500 (SPY) to fall off its recent highs. This raises the question of how much more downside we could see. And when will the bull market get back on track? In this timely commentary, 44-year investing veteran Steve Reitmeister shares his answers to these questions, including a preview of his top tips for staying ahead of the competition. Read below for more.
High inflation refuses “go quietly into the night“.
Instead, the latest CPI report was too hot, greatly reducing the likelihood of a rate cut in June or July. As a result, bond yields rose and stock prices fell on Wednesday.
Thursday’s PPI report was a little more timid, which helped to lighten the mood. But it clouds the outlook for the market.
So we’ll do our best to shed some light on our path forward from here in today’s commentary.
Market commentary
April began with a very slight sell-off, which seems natural given the rapid gains in the first quarter. Then, just as stocks were hitting their highs again, we were served an unwelcome CPI report on Wednesday, prompting investors to hit the sell button again.
Unfortunately, year-on-year inflation rose from 3.2% last month to 3.5% this time. Yes, this is the wrong direction because we want to continue our slide towards the Fed target of 2%.
We all know that inflation rarely moves in a straight line. However, this wasn’t the first inflation report to be above expectations… but it was certainly the most serious negative report that investors couldn’t dismiss.
The nerds out there (like me) will notice that sticky inflation metrics have gotten even worse. This value increased to 5% based on the monthly change from the previous 4%. There is simply no way that the Fed decides to cut rates in May, June, and probably not July given this recent data.
Given the seismic moves in the bond market, the investing world certainly agreed with that view. Most notable was the rise in the 10-year Treasury rate to nearly 4.6% on Wednesday. Things cooled off a bit on Thursday as the PPI reading was “slightly” better than expected.
This significantly changes expectations regarding the timing of the Fed’s first rate cut. A month ago there was a 72% chance this would happen in June. Now it is only 22%.
Moving into July was considered a near-knock-dunk with a 90% chance of lower rates. This is now a coin toss with only a 49% probability.
Finally, we believe the September meeting has a 70% chance of lower interest rates. This all suggests that investors are moving past May 1stst Fed statement with a microscope looking for the tiniest hints of what’s coming next.
Long story short, I think it’s borderline crazy for investors to expect new highs in stocks until inflation is better understood and certainty about the timing of the first rate cut increases. This suggests that the recent high of 5,265 for the S&P 500 (SPY) represents the upper end of the current trading range.
The lower part of this area is a little less clear. Will investors engage in deeper consolidation slightly below recent levels? The strong upswing on Thursday seems to point in this direction. But the longer this goes on without a resolution, the further we could fall below the 50-day moving average of 5,105 and perhaps put 5,000 to a serious test.
If this scares you, then I recommend putting your money in the bank rather than the stock market.
The only way to enjoy the rewards of a 27% rise in the S&P 500 since the end of October is to take the risk that comes with mild pullbacks and harsher corrections from time to time. This means that a test of 5,000 or even less would be a yawn in the history of stock market movements that have significantly improved our net worth over the past few months, years, decades, generations, etc.
My trading plan is to remain bullish. Just pay more attention to the value of your positions. If you weren’t buying more shares of these stocks today, perhaps it would be time to sell them and add new stocks that you think have better upside potential.
This also requires a “buy the dip” mentality as more volatility and difficult sessions are likely ahead. Then it’s time to step in and add shares of your favorite stocks.
All in all, we are moving back to a more normal bull market. Although 2 steps forward and 1 step back are just part of the dance. One more reason to find the right beat and dance along.
What do you do next?
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This is all based on my 43 years of investing experience in which I have seen bull markets, bear markets and everything in between.
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Steve Reitmeister’s trading plan and top tips >
We wish you much success in investing!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Publisher, 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%, while the benchmark S&P 500 index has increased by 1% over the same period.
About the author: Steve Reitmeister
Steve is better known to StockNews audiences as “Reity.” In addition to being CEO of the company, he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, plus links to his latest articles and stock recommendations.
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