As U.S. stocks approach their previous highs, investors are bracing for a potentially pivotal consumer price index (CPI) report, expected to be the most significant of 2024. This comes at a time when inflation rates have persistently exceeded the Federal Reserve’s 2% target, driven by escalating energy and housing costs. The CPI for March notably rose to a yearly rate of 3.5%.
Matthew Bartolini, head of SPDR research at State Street Global Advisors, emphasized the importance of data releases, which the Fed scrutinizes to guide its monetary policy decisions. The anticipation builds as the market reacts to every new economic indicator, poised to adjust strategies based on these insights. Recently, Fed Chair Jerome Powell hinted at a possible rate cut rather than an increase, calming the markets despite stalled progress on reigning in inflation.
The financial markets showed signs of optimism last week. The S&P 500 index closed up 1.9% for the week, just shy of its record high, while the 10-year Treasury yield settled at 4.503%, indicating a stabilization after recent volatility. Bartolini refers to the upcoming inflation data as a critical moment, akin to a “mini Super Bowl” for those closely monitoring policy implications.
Consumer sentiment towards inflation has darkened, as evidenced by the University of Michigan’s index, which saw a rise in one-year inflation expectations to 3.5% from 3.2%. This uptick may embolden companies to raise prices further, adding to inflationary pressures. High-level executives from major corporations like McDonald’s, Starbucks, and Mondelez have reported a heightened consumer focus on value, discernment in spending, and increased price sensitivity.
Amid these economic conditions, the S&P 500 companies have posted a 5.4% increase in blended annual earnings for the first quarter, the highest since mid-2022. This earnings season continues with key reports from Home Depot and Walmart, alongside the closely watched CPI and retail sales data.
Investor focus also remains on consumer behavior, with mixed signals coming from retail foot traffic data; Home Depot saw a slight decline, whereas Walmart experienced an increase in visits. This data suggests a divergence in consumer spending habits, which could influence the Fed’s assessment of economic and inflationary trends.
For those concerned about sustained high inflation, Bartolini suggests diversifying portfolios beyond growth stocks and bonds. He recommends U.S. Treasury Inflation-Protected Securities (TIPS), which adjust for inflation surprises, and sectors like home construction, which has benefitted from a prolonged shortage of new homes. Other defensive strategies include investments in short-dated credit, gold, natural resource stocks, and bank loans, which have attracted significant capital inflows this year.
The performance disparity among the largest technology stocks highlights the market’s uneven response to economic conditions. Nvidia has surged by over 81% in 2024, outpacing peers like Tesla and Apple, which have seen significant declines. Such divergence underscores the necessity for investors to consider a variety of assets to mitigate risks associated with volatile economic data.
As the market approaches its previous peaks, the outcome of the next inflation report will be crucial. If inflation moderates, it could pave the way for stocks to breach their recent highs. Otherwise, the continued uncertainty around inflation could maintain pressure on stocks and bonds alike. The week’s market movements, with the Dow Jones Industrial Average and Nasdaq Composite also nearing record levels, reflect a cautious optimism that investors might soon see conditions conducive to reaching new heights.
