Especially as the starting line for rate cuts keeps getting pushed further back. Thus, not a surprise that we have seen a modest pullback in prices from the recent highs.
On the other hand, I do not expect that investors are in a true “Risk Off” mood. They still see the positive catalysts of lower rates moving stocks to new highs in the months and years ahead. So, market bulls will not want to lose their grip on stocks at this juncture.
This points to more of a range bound and potentially volatile market in the near term. Let’s talk more about that, along with our game plan to stay on the right side of the action.
Market Commentary
Let’s check in first with the current chart for the S&P 500 (SPY):
Moving Averages: 50 Day (yellow) @ 5,180 > 100 Day (orange) @ 5,081 > 200 Day (red) @ 4,770
Back in April we ended a six month rally by breaking back below both the 50 and 100 day moving average. It didn’t take long to bounce back in May and have been well above ever since.
The recent pullback does likely point to a test of the 50 day moving average in coming days. That would amount to a classic 3% pullback for the market from recent heights. Hard to be fearful of that very common outcome.
If we break below, then I think the 100 day moving average (currently at 5,081 and soon to conjoin with 5,100) should offer ample support. To break below would need some more serious concerns about inflation picking up further delaying rate cuts.
Friday 5/31 offers the next clues on that front as we get the Fed’s preferred inflation gauge in PCE. The real key will be if the month over month reading comes in at 0.2% or lower showing that the pace of inflation is getting ever closer to the Fed’s 2% annual target.
After that we get served up the 3 main economic reports which kick off each new month. I am talking about ISM Manufacturing 6/3, ISM Services 6/5 and then Government Employment Situation 6/7 which brings with it an update on Average Hourly Earnings (aka wage inflation).
Generally, we want to cheer strong economic data. But not in this case where that would equate with greater inflationary pressures which we are trying to avoid.
Nobody is talking about rate cuts coming at the next Fed meeting on June 12th. However, that press conference from Powell should offer clues as to whether they are feeling more hawkish or dovish these days. This should tell us more about intentions for subsequent meetings on July 31st or September 18th.
The latter is now at roughly 50% odds of a rate cut. For as much as I want that to be true, I think that still may be wishful thinking as some of the most recent data points show inflation not fading fast enough. This also means the idea of 3 rate cuts this year is HIGHLY unlikely.
Do not take that to mean this bull market is over. Far from it because indeed the Fed will win this inflation battle in time. The only question mark is whether they will create a recession in the process.
That is not a great fear at the moment. Most signs point to a soft landing. But one does have to sleep with one eye open given that 12 of the last 15 rate cut cycles have ended with a recession.
For as ominous as that sounds, please do realize that recessions are fairly common, occurring every 5 years. And most are not as scary as we endured during the Great Recession of 2008/2009. Not to mention the oddity of the Covid Recession back in 2020. This would likely just be a fairly mild recession.
The best part of a recession is the easing of inflationary pressures that allows the Fed to finally cut rates. Plus corporations go through rounds of belt tightening that leads to higher profit margins when the next expansion arrives. This is what helps push stocks to new heights.
Sorry I went on the recession tangent. I am not really worried about this. But give 10-15% odds of occurring in the next year...then I do have to paint a picture of what could happen.
Back to the main story, we are in a bull market where stock prices have likely outpaced the fundamentals at this stage. This sets us up for a touch more downside in the near term. Yet as shared earlier, nothing too nefarious on that front.
When you have an environment like this then more conservative/defensive positions will outperform. That leans more large cap than small cap. As well as focus on more stable industries like consumer staples, utilities and healthcare.
Let’s not forget an eye towards value which is always in focus with our POWR Ratings system (31 out of 118 factors analyzed for each stock is in the value camp). This explains the strong outperformance of our stocks on Thursday as the overall market dipped into the red.
All in all, investors should stay fully invested as we are still in a bull market that could charge forward at any time. Especially true if any of the aforementioned economic reports show an easing of inflationary pressures which does increase odds of the first rate cut coming soon.
Just be mindful of the types of stocks you own. Hopefully the tips above point you in the right direction. Plus you will find some more thoughts on top picks in the section below...
What To Do Next?
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These hand selected picks are all based on my 44 years of investing experience seeing bull markets...bear markets...and everything between.
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Wishing you a world of investment success!
SPY shares rose $0.01 (0.00%) in premarket trading Friday. Year-to-date, SPY has gained 10.29%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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