Investors may have celebrated the end of high inflation too soon. The CPI report shows that inflation is jumping higher, pushing back the Fed's rate cut start date. This has taken the S&P 500 (SPY) off recent highs. This raises questions like how much more weakness can we see? And when will the bull market get back on track? 44-year investment veteran Steve Reitmeister shares his answers to these questions in this timely commentary, including an overview of his top picks to stay ahead of the pack. Read below for more.
High inflation refuses to “go quietly at night“.
Instead, the most recent CPI report was very tepid, which greatly reduced the chances of a rate cut coming in June or July. With that, bond rates rose on Wednesday and stock prices fell.
Thursday's PPI report was slightly more subdued helping to ease the mood. But it clouds the outlook for the market.
So we'll do our best to shine some light on our way forward from here in today's commentary.
Market Commentary
April started off with very soft selling, which seems quite natural given the fast pace of earnings in the first quarter. Then, just as stocks were heading back to higher levels, we got a junk CPI report on Wednesday that forced investors to hit the sell button again.
Unfortunately, year-on-year inflation rose from a reading of 3.2% last month to 3.5% this time. Yes, this is the wrong direction as we want to continue on our slide towards the Fed's 2% target.
We all know that inflation rarely moves in a straight line. But this wasn't the first inflation report to beat expectations…but it was certainly the most powerful negative that investors couldn't dismiss.
Nerds out there (like me) will note that the sticky inflation readings got even worse. This reading went up to 5% based on the month-over-month change from the previous 4%. There is simply no way the Fed is going to look at this latest data and decide to cut rates in May…June…and maybe not in July.
The investing world certainly agreed with this notion given the seismic movements in the bond market. Most notable was the rise in the 10-year Treasury rate to nearly 4.6% on Wednesday. This cooled a notch on Thursday given the “slightly” better-than-expected PPI reading.
That greatly changes expectations for the timing of the Fed's first rate cut. A month ago there was a 72% probability that this would happen in June. This is now down to 22%.
The move in July was considered a near slam dunk with a 90% chance of lower rates. This is now a coin toss with only 49% probability.
Finally, we see the September meeting coming up with a 70% chance of lower rates. All of this points to investors going through May 1ststr Fed testimony with a microscope looking for even the tiniest clues of what comes next.
In short, I think it's borderline crazy for investors to wait for new highs for stocks until inflation is better and safety is up around the time of the first rate cut. This points to a recent high of 5,265 for the S&P 500 (SPY) as the leading end of the current trading range.
The bottom of that range is a little less clear. Will investors do more of a consolidation just below recent levels? Thursday's hearty bounce seems to point in that direction. But the longer things go on without a resolution on this issue, the more we could go below the 50-day moving average at 5,105 and perhaps give 5,000 a serious test.
If this scares you, then may I recommend putting your money in the bank rather than the stock market.
The only way you can enjoy the reward of a 27% gain for the S&P 500 since the end of October is by taking the risk that comes with easy pullbacks and occasional sharper corrections. It means that testing 5,000 or even lower would be an opening in the history of stock market moves that have significantly improved our net worth over the past months…years…decades…generations … and so on.
My trading plan is to remain bullish. Just keep a better eye on the value of your positions. If you wouldn't buy more shares of that stock today…then maybe it's time to sell and add new stocks that you think have better upside potential.
This also requires a “buy the dip” mentality as there is likely to be more volatility and difficult sessions ahead. These are the times to log in and add shares of your favorite stocks.
Overall, we are returning to a more normal bull market. Where 2 steps forward and 1 step back is just part of the dance. So all the more reason to find the beat and jump right in.
What should be done next?
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This includes 5 recently added under-the-radar small caps with tremendous upside potential.
Plus I have 1 special ETF that is incredibly well positioned to outperform the market in the coming weeks and months.
All of this is based on my 43 years of investing experience seeing bull markets… bear markets… and everything in between.
If you are curious to learn more and want to see these 13 hand-picked lucky trades, then please click the link below to get started now.
Steve Reitmeister's Trading Plan and Top Picks >
I wish you a successful investment world!
Steve Reitmeister…but everyone calls me Reity (pronounced “fair”)
CEO, StockNews.com and Editor, Reitmeister Total Return
Shares of SPY were trading at $515.01 per share on Friday morning, down $2.99 (-0.58%). Year-to-date, SPY has gained 8.69%, versus a % gain in the benchmark S&P 500 over the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in Reitmeister Total Return Portfolio. Learn more about Reity's background, along with links to his latest articles and stock picks.
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