THE WEEK IN REVIEW: May 12-18, 2024

New week, same concerns

Inflation isn’t budging. The producer price index (PPI) for March was revised downward from its original reading of 2.1% to 1.8%. Then, final demand (PPI minus food, energy and trade services) increased by 3.1% for the 12 months ending in April. It’s the largest increase since climbing 3.4% one year ago.

Long story short: Inflation isn’t going anywhere. Despite some weakness from the initial first-quarter gross domestic product (GDP) reading and a soft April jobs report, all that did was take any potential rate increases off the table. Top-line consumer price index (CPI) ticked down a bit in April to 3.4%, but that was enough to drive markets to new highs (see next section). Markets are still banking on rate cuts, and with inflation stuck in the 3.5% range and showing no sign of further meaningful declines, the recent euphoria in U.S. stocks may be short-lived. Until we see consistent declines, we cannot expect any cuts. In fact, the Federal Reserve may be so preoccupied with watching inflation that it might be taking its eye off the slowing economy and job growth. If those deteriorate much more, we will see rate cuts — but only because the Fed will feel panic that we’re maybe sliding into recession.

The markets grind higher
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Remember when the Dow was at 30,000? That was back in November 2020 — less than four short years ago. We dipped below 20,000 briefly in March that same year. Last Friday, the Dow closed above 40,000 for the first time in history. Meanwhile, the S&P 500 crested above 5,300 that same day, ending at 5,808 for another new record. Same story for the Nasdaq: It also hit a new record on Wednesday but slid a bit to end the week.

Records are great, but they’re only mile markers. What markets are telling us is they are optimistic that we can still tame inflation, avoid recession and get rate cuts. That’s why a meager 0.1% decline in CPI was enough to boost us to new highs. The markets are in a good mood, and when markets are in a good mood, they want to go higher. How much higher is going to be a data-point-by-data-point process and will result in some volatility. However, until we see actual rate cuts, it’s wise to avoid getting overextended and exceeding your risk tolerance. Stay the course and maintain discipline. Enjoy the new highs, but be prepared for new challenges this year.
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Coming this week

• Four Fed officials will speak on a panel this Tuesday. They will be saying the same things they’ve been saying — but this time they’ll be saying them together. Unless someone goes off script, it’s unlikely anything new will come from the panel.
• Things will pick up on Wednesday with the release of the minutes from the Fed’s last meeting. The minutes will be much more interesting and informative than the prior evening’s panel and will showcase just how much alignment or disagreement there is among Fed members on the direction of rates.
• Other data this week will include existing home sales and MBA mortgage applications (Wednesday), new homes sales and unemployment claims (Thursday) and consumer sentiment (Friday).
• Earnings are winding down. As of May 10, 92% of S&P 500 companies had reported actual results, with 78% reporting positive earnings per share (EPS) and 59% reporting positive revenue. For the first quarter, the blended year-over-year earnings growth rate for the S&P 500 is 5.4%, which marks the highest year-over-year earnings growth rate for the index since the second quarter of 2022.