On their way back to record highs, U.S. stocks might encounter a mousetrap; this week’s consumer price report could prove to be the most significant of the year.
The Federal Reserve’s target inflation rate of 2% per year has not been met in the last three months due to rising energy and housing costs, which caused the consumer price index (CPI) for March to rise to 3.5% per year.
Head of SPDR research at State Street Global Advisors Matthew Bartolini stated, “Every time there is a data release, it is potentially a market-moving event,” in reference to the Fed’s data-dependent stance.
Fed Chair Jerome Powell, in early May, soothed investors by suggesting the central bank’s next move on interest rates likely would be a cut, not another hike, even while progress on inflation appears to have stalled.
Stocks and bonds rallied last week, with the S&P 500 index SPX ending Friday up 1.9% for the week at 5,222.68, or 0.5% off its record close in late March, according to Dow Jones Market Data.
The benchmark 10-year Treasury yield BX:TMUBMUSD10Y ended the week essentially unchanged at 4.503%, although it has since dropped from its late-April high of 4.706% due to recent whiplash.
Focus on consumers
Consumers have grown more dreary about the inflation outlook, according to the University of Michigan index released Friday. It showed a one-year inflation expectation climbing to 3.5% from 3.2% in April, potentially giving companies more cover to jack up prices.
On the flip side, top brass at major food and beverage companies have been “increasingly noting stress of the consumer, with McDonald’s MCD, +2.63% saying all income levels are increasingly seeking value, Starbucks SBUX, +0.57% saying customers are more discerning about where they spend money, and Mondelez MDLZ, +1.42% noting increased price sensitivity,” Mark Hackett, Nationwide’s chief of investment research, wrote in a Friday client note.
Most companies in the S&P 500 index already reported first-quarter results, producing a 5.4% blended yearly earnings growth rate as of Friday, the highest since the second quarter of 2022, according to John Butters, senior earnings analyst at FactSet Research Systems.
On deck is Home Depot Inc. HD, -0.29% on Tuesday, the CPI for April and retail sales on Wednesday, and Walmart Inc. WMT, +0.07% reporting Thursday.
“Consumers are working,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “As long as consumers are working, it gives them confidence to spend.”
Foot traffic data for Home Depot indicates a 1.1% decline in visits in the first quarter from a year before, while Walmart visits were up 3.9% for the same stretch, according to Placer.ai.
“The Fed is looking not only for the economy to cool, but some high levels of consumer spending on services to cool,” Saglimbene said.
Putting money into sticky inflation
Even if inflation stays above target for some time, there might still be ways to safeguard your investments while the Fed works to lower it and prepare the economy for a soft landing.
This year, one of the main themes for the “Magnificent seven” meg-cap technology stocks has been divergence. According to FactSet, chip darling Nvidia Corp. NVDA, +1.27% has led the group with a stunning gain in 2024 of more than 81% through Friday, while Apple Inc.’s stock was down nearly 5% and Tesla Inc.’s shares were down more than 32%.
With equities and bonds still vulnerable to inflation data, Bartolini recommends balancing portfolios that tend to be overweight growth stocks and bonds with U.S. Treasury inflation-protected securities, or TIPS, where income adjusts to cost of living surprises.
He also touted home builder stocks, given the shortage of new home supply over the past 15 years, including his firm’s SPDR S&P Homebuilders ETF XHB, which was up 50% on Friday from a year ago, according to FactSet.
Short-dated credit, gold GC00, -0.34%, natural resource-focused stocks and bank loans, which have taken in $4 billion this year, were other recommendations.
“What’s outperformed has been utilities, industrials and some of the cyclical value areas,” said Saglimbene at Ameriprise. “For stocks near record levels, looking to take out the late March highs, we likely need to see inflation cool a little bit next week,” he said.
The Dow Jones Industrial Average DJIA advanced 2.2% for the week to 39,512.84, ending 0.7% away from its late March record close, while the Nasdaq Composite Index COMP gained 1.1% for the week, only 0.6% shy of its mid-April record finish, according to Dow Jones Market Data.
