Finance

Stocks Recover as Consumers Reassess Inflation Path: Markets Close

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1 month ago

May 24, 2024

Stocks Recover as Consumers Reassess Inflation Path: Markets Close

(Bloomberg) — Stocks rose after data showed U.S. consumers tempered inflation expectations, boosting sentiment about the prospects for Federal Reserve rate cuts this year.

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The S&P 500 had its fifth straight week of gains – the longest bullish streak since February. When traders return from the holiday weekend, the “T+1” rule will take effect – causing U.S. stocks to unwind in one day instead of two. Treasurys barely budged after Fed Governor Christopher Waller said the factors that lowered so-called neutral rates could reverse.

Stocks rose further as data from the University of Michigan showed that US consumers expect prices to rise 3.3% annually over the next year, up from the 3.5% expected earlier this month. In April, respondents expected year-ahead inflation of 3.2%.

“After further research, consumers are not that pessimistic about the inflation trajectory,” said Jeff Roach of LPL Financial. “What we learned from this latest estimate from UofM is that consumer spending could slow, reducing inflationary pressures on the demand side of the economy.”

The S&P 500 topped 5,300 points. The Nasdaq 100 rose more than 1% while Nvidia Corp. was on its way to a new record high. Workday Inc. plummeted after the software company cut its subscription outlook.

The yield on government bonds with a term of two years remained little changed at 4.94%. The US bond market was expected to close early ahead of Memorial Day. The dollar ended a four-day winning streak. Oil and gold rose. Bitcoin rose.

According to Jim Baird of Plante Moran Financial Advisors, the consumer outlook grew bleaker in May as growing cracks in the fundamentals of the labor market and the realization that interest rates could remain higher for longer weighed on the collective mood.

“Will they continue to spend or start cutting back in anticipation of tougher sledding trips ahead?” Baird noted. “That is the unanswered question. If May’s sentiment index is any indication of near-term direction, a more pessimistic consumer is likely to tighten their proverbial wallets in the coming months.”

The Fed’s favorite inflation gauge — the main PCE deflator due next Friday — is likely to moderate to its slowest monthly pace yet this year, according to Bloomberg Economics’ Stuart Paul. However, the moderation was likely related to a sharp decline in volatile airfares, while easing financial conditions continued to drive inflation.

According to LPL Financial’s Quincy Krosby, the report could provide a decidedly positive catalyst for the market if the data comes in cooler than expected.

“If that is not the case, even if the PCE remains stable, the market could be satisfied that inflation remains somewhat under control,” she noted. “But yesterday’s market action suggests that investors and traders alike are losing patience with the Fed’s inability to suppress prices, which continue to rise.”

“It was another week dominated by ‘Fed fear’,” said Florian Ielpo of Lombard Odier Asset Management. “However, let’s not forget that despite rising interest rates, corporate profits appear resilient, subtly suggesting that the impact of what is generally seen as positive economic news may be less clear-cut.”

Minutes from the Federal Open Market Committee’s two-day meeting ending May 1, released Wednesday, showed that while participants believed monetary policy was “well positioned,” several officials mentioned a willingness to move forward tighten if justified.

According to Ryan Grabinski of Strategas Securities, mentions of the word on corporate earnings in the S&P 500 have been rolled over, much like the actual trend of inflation itself.

“However, it is still elevated to pre-pandemic levels, similar to the current inflation rate,” he said. “It will be telling to see how companies deal with high inflation in the coming quarters, but given the upward trajectory of margins, it appears the base case is to continue to push costs onto consumers.”

According to Binky Chadha of Deutsche Bank AG, the stock market could continue to rise to record highs even if the Fed refrains from cutting rates this year as the economy and profits grow.

Meanwhile, Bank of America Corp. strategist Michael Hartnett says the rally in global stock markets is at risk of overheating.

The bank’s so-called global breadth rule shows that about 71% of stock indexes are trading above both their 50- and 200-day moving averages. A reading above 88% would trigger a contrarian sell signal, he said.

While concentrated markets haven’t historically led to poor returns, according to Ross Mayfield of Baird Private Wealth Management, it’s usually a sign of a healthier economy when breadth (the number of individual stocks and sectors doing well) is better.

“And while there was some fear last year about the heavy concentration in Big Tech stocks, the market has broadened significantly in recent months,” he noted.

In a bull market with no crashes, no sudden spikes in volatility, and no lasting correction, prudent investors struggle to find effective ways to hedge their positions.

Buying put options, a traditional choice to protect against recessions, has not paid off for investors wary of the rally that has pushed stocks around the world to new record highs. Volatility sellers have pushed the VIX index to its lowest level since 2019 this month, and the S&P 500 index has gone more than 300 days without a 2% drop in a single session.

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