On Thursday, the stock price attempted to bounce back as positive news from NVDA’s very impressive earnings report sent the stock higher.
Unfortunately, NVDA’s strength only really benefits a small percentage of AI-related stocks and is not representative of the economy as a whole.
So the sell-off happened 15 minutes into trading when the flash PMI reading came in much higher than expected, meaning inflationary pressures continue to push up bond rates and send the market plummeting.
Let’s take a closer look at the recent series of news and how it may affect your market outlook and trading plans going forward.
Market Commentary
As is becoming all too common, traders are overly optimistic about the possibility of a rate cut in July or September. That was the clear message coming from the minutes of the May 1 Fed meeting, released on Wednesday afternoon, sending bond rates soaring and stocks selling, sending the S&P 500 (SPY) down toward 5,300.
Essentially, they are being forced to keep interest rates high for longer because inflation is so persistent (this is what they keep telling us but people aren’t listening), and may need to raise interest rates another notch to deal the final death blow to high inflation in order to get back on track to the 2% target.
So, despite NVDA surprising its audience on Thursday morning, it didn’t take long for the reality to become clear that the entire market was sinking into the red. I say this when the flash PMI number was released at 9:45am ET, coming in at 54.4, well above the expected 51.1.
Typically, this report is not a market-moving event, as many wait until the first week of the month when the more widely watched ISM Manufacturing and ISM Services reports are released. However, it was impossible not to notice a surge in economic activity in this report, which will likely be reflected in the ISM version two weeks from now.
Typically, we celebrate positive economic news, but not when we are battling high inflation, as increased activity translates into rising inflationary pressures that are likely to show up in the next inflation report.
Bond investors quickly got the memo, as can be seen by looking at the intraday chart of the 10-year Treasury note, which spiked as soon as the news was released.
And the timeline at 9:45 a.m. ET coincides with when the Russell and Dow dropped into negative territory and continued to drop further and further towards the finish line.
July 31st The likelihood of a rate cut at the Federal Reserve’s meeting has dropped from 47% to 13%.Number The odds of a rate cut at the meeting were 73% not too far away before but now still sit at just over 50%.
I was talking to some of my fellow investors and the conversation turned to how most investors aren’t really prepared for the “higher interest rates for longer” theme to come to fruition. The conversation took place on a Tuesday morning, but the data since then has only reinforced the idea that investors are still a bit too optimistic about the timing of interest rate cuts and may need to rethink their investment strategies.
Don’t worry… neither I nor my fellow investors are bearish. Rather, we believe there is more risk to the downside than the upside in the near term as stocks overall are outperforming fundamentals at the moment and investors need to recalibrate for how long it will take for the first rate cuts to actually materialize.
Future economic reports will shed more light on this, so I will reiterate what I said in my previous comments:
“5/31 PCEThis is the Fed’s favorite inflation metric, and if it’s in line with the improvement shown in last week’s CPI report, it could have a positive boost to stocks. Conversely, any bad news here could send stocks sliding from their recent highs.
6/3 ISM Manufacturing: The first of three big economic reports to be released each month. This area has been weak for a long time. Oddly enough, investors don’t want it to get hot, as it would be a sign of inflationary pressures. So a reading below 50 would be the most welcome news.
6/5 ISM Service: This broad range of the economy has trended lower for three consecutive sessions since dropping below 50 for the first time in early May, leading to a rise in stock prices (as it equates to lower inflationary pressures). Therefore, an ideal level would be around 50, without stoking fears of a recession or overheating the economy and causing even higher inflation.
6/6 Government Employment Status: “Nobody is worried about unemployment at this point. The main focus of this monthly report will be the results for average hourly earnings (wage inflation). This aspect is very volatile and is being closely watched by the Fed. It was good to see signs of easing in the early May report and we hope that will continue in the early June report.”
Long term, we are in a bull market. But with a 50% gain from the bottom just 19 months ago, you have made some easy money. Now is the time to take profits out of overextended positions and reallocate them into positions with higher value and upside potential.
The longer the first rate cut is delayed, the more likely we are to experience a 3-5% market-wide drop. That’s not so scary considering the gains already in hand.
In fact, think of this as simply an opportunity to buy into your favorite stocks at a lower price at an even better price. As always, focus on the best stocks based on the POWR Ratings to guide your path. I’ll discuss my favorite POWR Ratings stocks below…
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Steve Reitmeister…But they call me Latee (pronounced “righty”).
CEO of StockNews.com and Editor of Reitmeister Total Return
SPY shares were trading at $527.81 per share on Friday morning, up $1.85 (+0.35%). Year-to-date, SPY is up 11.39%, while the benchmark S&P 500 index is up % over the same period.
About the Author: Steve Reitmeister
Steve is better known to StockNews readers as “Reity.” Not only is he the CEO of the company, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Read more about Reity’s background and links to his latest articles and stock picks. Read more…
