It’s not the time to be bullish yet, but well, we’re getting close to it.
For now, the market seems to be holding its breath.of
Dow Jones Industrial Average
It fell 1.11% last week.
NASDAQ Composite
increased by 0.40%,
S&P500 Index
Down 0.29%, it was the sixth straight week of less than 1% movement in either direction. It’s as if investors are waiting for something to break somehow.
And it can break even further. Consider this week’s inflation data. On Tuesday, April’s consumer price index marked its 10th straight month of slowing inflation, while Wednesday’s producer price index was ahead of it, rising at its slowest annual pace since early 2021.
That’s good news for the stock market, as well as for the Federal Reserve, which is trying to keep prices down. When the annual CPI rate fell by at least 5 percentage points year-over-year, the S&P 500 showed a median return of 14.9% over the subsequent 12 months. According to Bespoke Investment Group data.
The slowdown in inflation also suggests the Fed may pause at next month’s Federal Open Market Committee meeting. Futures market pricing suggests a greater than 90% chance that the Fed will keep the Fed rate unchanged at its target range of 5.00% to 5.25% in June.
There is still some time before the situation changes, especially given May’s employment and inflation data, which will be released before the meeting. Jonathan Golub, chief U.S. equity strategist at Credit Suisse, wrote that stocks historically performed well during the Fed’s hiatus, with the S&P 500 index averaging 16.9% in the 12 months after the last cycle hike. It recorded a return, but also lost an average of 1% in the year after the first rate cut.
Investors are not ready for a rally. Systematic trend-following funds have recently increased their equity exposure to just above neutral for the first time since the end of 2021, according to Deutsche Bank’s Parag Zatte. But discretionary investors are heavily underweight the market, with equity exposure at its lowest level in a year and just in the 9th percentile historically. Many investors are waiting for the market to fall before putting money in. But if it goes higher, we may have to start buying.
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There are still many possibilities for problems. First and foremost is the debate over the debt ceiling and all the worst-case scenarios that could result from a US debt default. Banks may still hold back on lending enough to trigger a credit crunch. There is little confidence in the earnings outlook for the second half of the year, and signs of a recession continue to flash red outside the job market.
This is a wall of concern, but the stock market looks poised to climb over it. The balance of evidence has tilted in the more bullish direction. Investors waiting for the next drop to buy may not get the chance.
write destination Nicholas Jasinski, nicholas.jasinski@barrons.com
