Breaking News
Investing Pro 0
Cyber Monday Extended SALE: Up to 60% OFF InvestingPro+ CLAIM OFFER

U.S. stock market rebound faces key inflation test

Economy Jun 03, 2022 06:05PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: The Federal Reserve building is seen before the Federal Reserve board is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts
 
US500
-1.44%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
JPM
+0.17%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
MS
-2.56%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
TSLA
-1.44%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
LPLA
+1.62%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

By Lewis Krauskopf

NEW YORK (Reuters) - A rally that lifted U.S. stocks from the brink of a bear market faces an important test next week, when consumer price data offers insight on how much more the Federal Reserve will need to do in its battle against the worst inflation in decades.

Despite a rocky week, the S&P 500 is still up over 5% from last month's lows, which saw the benchmark index extend its decline to nearly 20% from its all-time high. The index was recently down about 14% from its Jan. 3 record after losing 1% in the past week.

More upside could depend on whether investors believe policymakers are making progress against surging prices. Signs that inflation remains strong may bolster the case for even more aggressive monetary tightening, potentially spooking a market already battered by worries that a hawkish Fed could deal a serious blow to U.S. growth.

“This market is likely to remain range-bound until we get a meaningful move lower in inflation,” said Mona Mahajan, senior investment strategist at Edward Jones, which currently favors large-cap stocks over small-cap, given the ability for larger companies to absorb higher input and wage costs. “Clearly, the print next week is going to be key.”

The consumer price index (CPI) for the 12 months through April rose 8.3%, down from an 8.5% annual rate reported in the prior month, which was the largest year-on-year gain in 40 years. Friday's inflation report for May is one of the last key pieces of data before the Fed's June 14-15 meeting, at which the central bank is widely expected to raise rates by another 50 basis points.

If inflation is "continuing to be a problem, the Fed may not have the option of coasting later this year," said Paul Nolte, portfolio manager at Kingsview Investment Management, adding, "The higher the interest rates, the more the struggle for the market."

Nolte has lightened positions in equities broadly in the portfolios he manages, especially in growth stocks, and raised cash levels, pointing to factors such as still-lofty stock valuations.

INVESTORS WEIGH DATA

The CPI report comes as investors gauge how the 75 basis points of monetary tightening already delivered by the Fed this year is affecting growth. Employment data released Friday showed that U.S. employers hired more workers than expected in May and maintained a strong pace of wage increases, signs of strength that could keep the Fed on an aggressive monetary policy tightening path.

Meanwhile, gloomy views from several top business leaders, including JPMorgan Chase (NYSE:JPM)'s Jamie Dimon and Tesla (NASDAQ:TSLA)'s Elon Musk, have weighed on hopes that the central bank can cool inflation without hurting the economy. Musk said in an email to executives that he has a “super bad feeling” about the economy and needs to cut about 10% of jobs at the electric carmaker, Reuters reported Friday. [L1N2XQ0PI]

Investors' view of inflation is critical to how they value equities, as higher prices have typically spurred the Fed to raise interest rates, with higher bond yields in turn reducing the value of future corporate profits. Rising prices also raise costs for businesses and consumers.

The S&P 500 trades at around 18.7 times its trailing 12 month earnings, a rich valuation compared to other inflationary periods that suggests investors believe the current level of price increases may not last, according to Jeff Buchbinder, equity strategist at LPL Financial (NASDAQ:LPLA).

LPL believes inflation will eventually fall this year and that companies have solid earnings momentum. The firm's year-end target on the S&P 500 is between 4,800-4,900, which at the low end stood about 16% above the index’s level as of Friday afternoon.

Others have been less optimistic. Morgan Stanley (NYSE:MS) strategists earlier this week called the latest rebound just a "bear market rally," and, citing negative trends for earnings and economic indicators, projected the S&P 500 would drop to around 3,400 by mid-August.

“There is consensus agreement that we have likely seen the high prints or the peak inflation numbers in the rear-view mirror," said Art Hogan, chief market strategist at National Securities. "If that proves to not be true ... that is going to tip over the apple cart for markets."

U.S. stock market rebound faces key inflation test
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (6)
gab nea
gab nea Jun 04, 2022 8:41AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
it's all bidens fault, happy?
gab nea
gab nea Jun 04, 2022 8:37AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
this site bans comments from democrats?
Alan Rice
Alan Rice Jun 03, 2022 8:44PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Not much chance of a "hawkish Fed" with the Midterms coming online. (Unless The Dems really do care about inflation, which actually They should, considering that it impacts Them more than it does Trumpublicans).
Larry DeAngelis
Larry DeAngelis Jun 03, 2022 6:52PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
how's Dog coin doing for him?
jason xx
jason xx Jun 03, 2022 3:38PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I'm going to make my investment decisions based on Elon musks "super bad feeling".. The market gets more pathetic everyday
jason xx
jason xx Jun 03, 2022 3:37PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The only thing everyone mentioned in this article have in common is that none of them know what is going to happen.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email