New highs in the stock market are usually worth celebrating. Not this time.
The stock market’s rise came after April’s consumer price index released on Wednesday showed inflation rose 3.4% year-on-year, down from 3.5% in March. Inflation had been rising for the previous three months, and markets were worried that the Federal Reserve would have to raise interest rates to bring down prices. Instead, interest rate cuts are back on the table.
“The market was very concerned that inflation was going to pick up again and get back into the 4-degree range,” said Doug Bykoff, chief investment officer at asset management firm Bykoff Group. “This announcement provides reassurance that the Fed doesn’t necessarily need to raise rates.”
Probably too comfortable. In reality, the Fed generally wants inflation to fall toward 2%, but core CPI, which excludes food and energy, rose 3.6%. Additionally, shelter prices, which account for almost half of the core index, rose by 5.5%. They also tend to be sticky, meaning inflation could still justify Fed tension.
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“The debate is far from settled, and core inflation remains too strong,” writes Dennis Debouchere of 22V Research.
And if inflation returns to an upward trend, many of the current pillars of growth will collapse. The decline in bond yields from nearly 5% in April to just over 4.3% this week certainly helped push stocks higher, but a reversal, as has happened recently, could send the S&P 500 down. And from a market technologist’s perspective, yields appear to be trending upward, not downward. “Yields are still in an upward channel,” said Victor Cossel, macro strategist at Seaport Research Partners. “In our view, there is no permanent stock rotation.”
Even more frightening is the fact that economic growth appears to be slowing. Bad news is now being taken as good news. For example, retail sales rose 3% in April, down from 3.8% in March, but the S&P 500 index was still up 0.5% on Tuesday, the day the report was released. However, after adjusting for inflation, consumer demand changed little. This also suggests that the Fed needs to think about cutting rates rather than raising them. But there will come a time when too much bad news becomes bad news, even if it’s a short-term problem. Nicholas Colas, co-founder of Datatrek Research, said: “There will certainly be further challenges for investors to absorb in the coming months. There will probably be fears of a recession at some point. ” he wrote.
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That may be why the market itself is less excited about recent new highs. Katie Stockton, founder of Fairlead Strategies, said the S&P 500 “responsively rallied to new highs and is now showing signs of running out of upside.” [past] This week’s inflation data,” he said, expecting the index to roll over next week.
We are also feeling a little tired of it.
Write destination Jacob Sonenshine jacob.sonenshine@barrons.com
