Overall, U.S. stock market indexes loved the inflation data and the Fed decision last week, as the S&P 500 gained 2.58%, the Nasdaq 100 surged higher by 3.82%, and the Dow Jones Industrial Average increased by 1.25% for the week.
S&P 500 Makes It Five Positive Weeks in a Row
Remember 2021? Before higher interest rates stole the spotlight, major stock market indexes surged.
It seems that the S&P 500 is having flashbacks, notching its fifth straight week of gains. This is its longest weekly streak since the fourth quarter of 2021.
Inflation: Lowest Annual Reading in Two Years
Before the Fed announcement last Wednesday, all eyes were on Consumer Price Index (CPI) data. The softening inflation data, released on Tuesday, resulted in a double whammy of bullishness for the week.
Here’s an overview of the data:
- CPI increased only 0.1% month-over-month.
- CPI increased 4% from one year ago, a two-year low and lower than the 4.1% expected.
- Core CPI rose 5.3% from one year ago.
- Food prices are still higher by 6.7% from a year ago.
In addition to the May data, the 4.9% inflation number in April was very constructive.
While all inflation metrics may not move together simultaneously or in a straight line, headline inflation moving lower amid somewhat sticky core inflation is still a victory on the inflation front. Inflation has been cooling, folks.
Looking ahead, markets will focus on Federal Reserve Chair Jerome Powell's testimony before Congress–part of his semiannual testimony on monetary policy.
Fed Skips Rate Hike
After ten sequential rate hikes, the Fed kept rates unchanged at last week's June meeting. Markets widely expected a pause by the Fed, and the Fed did not disappoint. Markets loved the pause in hikes.
"Holding the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy," the Federal Open Market Committee said in its post-meeting statement release.
And while recent inflation data shows consumer prices moving in a cooling direction overall, Powell said: “It will be appropriate to cut rates at such time as inflation is coming down really significantly. And again, we’re talking about a couple of years out. As anyone can see, not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate.”
For now, markets seemed to celebrate the Fed staying pat on rates and cheered May's cooling inflation data.
Retail Sales Unexpectedly Strong
It is quite an economy we have going here. Retail sales data showed a surprise uptick in spending in May. The data, combined with cooling inflation signals and a pausing Fed (at least for now), provides a backdrop of strength for U.S. equities. Markets could get used to this!
For May retail sales, expectations of economists polled by Reuters were for a 0.1% decline, but data showed a 0.3% gain in May.
Retail sales data is adjusted for seasonality but not for inflation, and this month’s data indicates healthy consumer spending despite the previous ten-in-a-row interest rate hike campaign.
The Proof Is in the Pudding
Continued cooling inflation data is what everyone wants to see. The Fed rate hike pause is a bonus after ten straight hikes, though there could be a couple more rate hikes later in the year.
Many economists have been calling for a recession since 2022, but when looking at the major U.S. stock markets, it hasn't happened (yet). The proof is in the pudding, and as of the time of writing, the S&P 500 is up over 20% from its low in October.
Ultimately, as long-term investors, recent market strength won't dramatically impact our thinking–our investing attitude remains consistent during market cycle peaks and troughs.
With that said, if you have questions about your portfolio, the markets, or the economy overall, please don’t hesitate to respond to this email or give me a call. I’m always happy to be a resource for you.