The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.June 21st Market Update
The S&P 500 is having another strong month, however since the pullback in April, the performance has been pretty narrow. Similar to what we saw in most of 2023, the S&P has been largely carried by the biggest tech stocks in the index. Having that concentration can lead to fast drawdowns, however you could also see the laggard’s gaining traction. For the latter to happen, we would need to see further progress on the disinflation front while at the same time having resilient economic growth. To determine the likelihood of that happening let’s examine the recent economic data.
After the lack of progress on inflation in the first quarter, the inflation data has started to move back in the right direction particularly in the most recent CPI (Consumer Price Index) and PPI (Producer Price index) readings. The labor market remains on solid footing, however, is showing some signs of softening. While the headline payroll number came in well above consensus, the unemployment rate ticked up to 4%. This marks a .6% rise in the unemployment rate since bottoming in beginning of 2023. Now don’t get me wrong, a 4% unemployment rate is historically low, I just think it is important to continue monitoring the rate of change. One explanation could be attributed to the rebound in immigration coming out of the pandemic. As long as the available job opening is above pre-pandemic levels, my concerns are subdued. On the economic growth side, we saw some weaking in retail sales and manufacturing, while service spending remained strong. So how does all this effect the path of monetary policy and the financial markets?
In the latest FOMC (Federal Open Market Committee) meeting we got the latest projections from the members of the Fed. It illustrated rate cuts going from three down to one this year, although essentially just got pushed into the following years. They made no changes to the unemployment rate or GDP forecasts for this year, however increased their inflation targets two tenths to 2.6%. In the presser Powell made it clear that he makes sure everyone knows they can make changes to their forecasts up until the end of the meeting, although most don’t. Why I bring that up is because we received the promising inflation numbers that morning which signals it wasn’t truly represented in the projections. Based on the latest CPI and PPI data, the feds preferred measure of inflation the PCE deflator is likely to be at their year-end target this month. He did acknowledge that the lower readings we had in the back half of last year are going to be a headwind for the year over year numbers. Either way, I think the possibility of two rate cuts is back on the table for this year given the recent economic data. I believe that puts the financial markets in a healthy environment for the remainder of the year. That however does not mean we will not have pullbacks in the meantime. Valuations are stretched on the S&P 500 market cap weighted index and are now technically over bought on both the daily and weekly charts. That does warrant some caution and increase the likelihood of a pullback. I think it will lead to some consolidation and possibly a minor pullback in the near term. Typically, election years have increased volatility due to the uncertainty which historically has led to a pullback in the months preceding the election. In conclusion as long as the economic data reflects a soft landing, I will take pullbacks as more of a buying opportunity rather than an indication of a greater drawdown.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Economic forecasts set forth may not develop as predicted.