Weekly Market Update: May 27, 2024

Alex Ralicki |

Inflation remains relatively high, but there is optimism that it is again starting to move in the right direction. True, April producer prices were stronger than expected, and the pace of consumer price growth is still running well above the Federal Reserve’s target rate of 2%. However, there was some easing at the consumer level after the pace of price growth reaccelerated in the first quarter, and energy prices have recently weakened. This gives Wall Street hope that the central bank may still cut interest rates sometime in the second half of this year. Treasury yields retreated on this sentiment and ignited another bullish stretch for equities.

Senior Federal Reserve officials have not wavered on their monetary policy stance. Indeed, the consensus among Federal Open Market Committee (FOMC) voting members is that monetary policy is sufficiently restrictive and interest rates will need to remain “high for longer” to effectively tame inflation. This is in contrast to what Wall Street is thinking, but market pundits have been wrong a number of times in the last 18 months about the Federal Reserve turning dovish. The continued resiliency of the U.S. labor market limits any pressure on the lead bank to reduce interest rates.

The Federal Reserve is still walking a tightrope. Clearly, more work needs to be done to bring inflation closer to the bank’s comfort level, but the Fed also must guard against slowing the economy too much. This would bring concerns about stagflation, which is a period of slowing growth amid a weakening labor market and still elevated inflation. There have been signs of fatigue among consumers, along with declines in the pace of residential construction and manufacturing activity.

Conclusion: With a successful first-quarter earnings season in the rearview mirror, the focus will be on inflation and the Fed’s near-term monetary policy stance. In recent weeks, this has proven to be a “Goldilocks” scenario for equity investors. However, there remains some uncertainty about if and when the Fed will reverse monetary course and investors may want to exercise some caution. We think a portfolio mostly led by stocks is warranted, but continued attention should be given to those of high-quality companies. 


Source: ValueLine.com