@theMarket: Markets Flirt with All-Time Highs

Like birds on a wire, stocks wobbled early this week neither moving higher nor lower. Higher jobless claims and an okay Treasury auction nudged the indexes towards the goal line with the S&P 500 Index above the 5,200 level for the first time in a month.

 

However, there is still a lot of indecision out there. Growth seems to be slowing. Inflation remains sticky. Consumer confidence is falling, and the Fed is on hold. Countering those negatives, there are some positives. Corporate earnings have been good. Yields remain in a range and the dollar has pulled back from highs. Neither the bulls nor the bears have enough data to end this stalemate. This week should resolve the matter.

 

The Producer Price Index will be announced on May 14 (estimate plus-0.22 percent), followed by the Consumer Price Index (estimated core CPI plus-0.31 percent) a day later. All eyes will be on those data points. Given that the last three months of inflation readings have shown an increase, investors are holding their breath to see if month four will reinforce the present trend of higher inflation. We will also hear from Jerome Powell, the Federal Reserve Chairman on Tuesday as well.

 

The implications for another hot result would put the lid on the coffin of any expected rate cuts this year by the Fed. The betting has already dropped to maybe one cut this year. That is largely due to the last GDP print (1.6 percent growth for the first quarter of 2024) which showed a weakening economy compared to the final quarter of 2023 (plus-3.4 percent).

 

The ramifications for the equity and bond markets could be serious. A weak inflation number in one or both indexes would be taken positively I imagine with stocks climbing, possibly to new highs, and bond yields falling. It would also be beneficial for the commodity space and could push precious metals and copper higher. On the other hand, hotter numbers would have the opposite effect.

 

No one knows for sure, but readers aren't paying me for "on the other hand" opinions. So, I will come down on the side of cooler numbers next week. I base my guess on things like used car prices that have come down by about 30 percent thus far in 2024 and are accelerating to the downside. Insurance premium increases have been the major culprit in the hotter CPI data thus far and I am expecting at least a leveling out of price increases in car insurance this month.

 

Corporate earnings this quarter have provided support for the markets thus far. Although most companies did beat analysts' earnings and sale estimates (81 percent) the reaction to these positive surprises has been less than stellar compared to prior quarters. Some believe that these results have already been discounted by investors. However, analysts are already increasing their estimates for the next quarter and the year overall. Three sectors, (energy, healthcare, and materials) have seen a reversal from negative to positive growth in their earnings per share momentum for the year.

 

The U.S. Treasury held two bond auctions this week. The $42 billion Ten-year Treasury auction met with tepid demand, while the government's $25 billion Thirty-year bond auction had enough bought demand to keep bond yields lower and the stock market supported.

 

The usual 'sell in May and go away' argument may not hold much water this year. April was a down month, and since 1928 when April is negative, May is up 74 percent of the time. It is a tricky time for the markets. Betting on which direction we head in the short term is tough and dependent on the inflation data. Longer-term, I am still quite positive about equities both here and abroad.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.