Battle Royale: Inflation vs. Stock Market

High inflation will just not go away. And thus just as the S&P 500 (SPY) seemed poised to bounce back from recent lows it was sent reeling once again. What is happening with inflation? What does it mean for Fed rate cuts? And what is an investor to do in this environment? 44 year investment veteran Steve Reitmeister will answer all these questions and more in his latest market commentary below...

The PCE report on Thursday morning was a big red flag to investors that the inflation fight is far from over. This further pushes back the assumed starting date for the Fed to finally cut rates. This also quickly reversed the benefits of the recent stock bounce as the S&P 500 (SPY) had a fairly rough session on Thursday.

This all points to a long grueling summer for stocks as benefits of rate cuts will not soon be in hand. Thus, with not much reason to go higher investors will contemplate how low they should go instead?

Read on below for more insights including a trading plan to stay one step ahead of the pack.

Market Commentary

Here was my initial comment to Reitmeister Total Return members early this morning when market futures were pointing about 1.5% lower. Note that most media outlets were striking the loss up to lower than expected GDP reading.

“As for the overall market weakness this morning it has NOTHING to do with the lower than expected GDP reading at +1.6%. In fact, that cooling of the economy would normally be celebrated in a high inflation environment.

Unfortunately, it came along with a surprising spike in the Core PCE inflation report to 3.7% from the previous 2%. That is a not so welcome development in the case of inflation sticking around likely further pushing out the start date for rate cuts. This will have the S&P 500 testing recent lows...maybe pressing lower.

This does not change the bull market premise. It just delays when the next upward leg will arrive and has us being a touch more conservative in our stock selection leading to today’s moves.” 

As you already know, the starting line for rate cuts keeps getting pushed further and further into the future. Today’s news put an exclamation point on that notion.

The odds of the July 31st Fed meeting being the start for rate cuts is now down to 32% from 44% on Wednesday. And down from 83% just a month ago.

September 18th Fed meeting odds were trimmed from 70% to 58% on the news. This was seen as a slam dunk at 96% likelihood a month ago.

Even rate cuts by November 7th are no longer so certain at just 68% probability.

This means the following events will hold even more importance as folks weigh inflation data and likely Fed decisions.

5/1 Fed Meeting

5/3 Government Employment Situation- Wage Inflation component

5/14 PPI

5/15 CPI

Interestingly the market found pretty firm support at 5,000 on Thursday and bounced to a close of 5,048. Here is a closer look at key trend lines:

Insert ChartMoving Averages: 50 Day (yellow) @ 5,122 > 100 Day (orange) @ 4,955 > 200 Day (red) @ 4,687

I think this is not the last test of 5,000. Nor the last test of the 100 day moving average. And yes, even the 200 day will likely be tested. However, I sense that will be more like in a month or so from now when that trend line is up to 4,800 or higher.

No...this is not a time to cry “bear market” or run for the hills. Simply stated, investors were a bit too optimistic about the timing of Fed rate cuts leading them to bid up price above levels the fundamentals could support.

With a 5-10% haircut in prices for the overall market, and stiffer penalties for select overpriced growth stocks, then this market can find a better price equilibrium that will be a launching point for whenever rates are to be cut.

I think 5,500 is still a likely destination for the S&P 500 before the year is through. And on to 6,000 or more in 2025 seems about right.

This also means that the annual pace of gains is going to decelerate from the initial burst from bear market bottom. That is a time honored pattern for early bull markets.

Those who want to outpace that modest gains should continue to focus on companies with the best growth prospects. Just don’t allow yourself to overpay for them.

The key to success in that regard is a focus on the 118 fundamental factors calculated in our POWR Ratings. 31 of them dialed into value criteria.

The success of the POWR Ratings is well known with a +28.56% average annual return going back to 1999. That is nearly 4X the S&P 500 over that stretch.

If you want to discover my favorite POWR Ratings stocks to consider now, then read on below...

What To Do Next?

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This includes 5 under the radar small caps recently added with tremendous upside potential.

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This is all based on my 44 years of investing experience seeing bull markets...bear markets...and everything between.

If you are curious to learn more, and want to see these lucky 13 hand selected trades, then please click the link below to get started now.

Steve Reitmeister’s Trading Plan & Top Picks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

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SPY shares were trading at $508.47 per share on Friday morning, up $4.98 (+0.99%). Year-to-date, SPY has gained 7.31%, versus a % rise in the benchmark S&P 500 index during the same period.

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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 the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.

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