July 15, 2024

Stocks Held Back by Concerns About Stagflation—What Comes Next?

Last week, US stock market gains persisted, but renewed concerns about stagflation dampened sentiment in anticipation of inflation and retail sales data releases.

The tech-heavy Nasdaq ended the week at 16,340.87, up 1.14%, while the S&P 500 closed at 5,222.68, up 1.85% for the week. The Dow Jones was at 39,512.84, up 2.16%.

Taiwan Semiconductor’s improved earnings and stable bond yields propelled last week’s rise, which followed two weeks of gains.

However, a consumer study on Friday revealed further negative economic trends in the United States. May saw a decrease in consumer sentiment at the University of Michigan, from 77.2% in April to 67.4%. On top of that, forecasts for inflation in the coming year increased from 3.2% to 3.5%.

The decline in consumer mood indicates that spending, which accounts for over two-thirds of the nation’s gross domestic product (GDP), is waning. As a result, the already sluggish U.S. economy may take a nosedive.

At the same time, inflation could remain elevated in the coming year due to increasing inflationary expectations.

Stagflation concerns have returned due to the recent slowdown in economic development and increase in inflation. Constraints imposed by this macroeconomic framework prevent the Federal Reserve from tackling the dual problems of low economic growth and high inflation using either traditional or unconventional monetary policy.

Given the current state of the economy, investors and traders in bonds and stocks are hesitant to increase their wagers. They reduced their holdings as a result of Friday’s release of the consumer sentiment data.

“This week, the stock market gained as it looked ahead, buoyed by solid corporate earnings and expectations that the Federal Reserve will keep rates elevated in response to persistent inflation pressures,” said Anthony Rousseau of TradeStation, Head of Brokerage Solutions, in an interview with the International Business Times.

“Meanwhile, Treasury yields remained relatively stable after cooling from their recent move up from last week’s dovish Fed, reflecting expectations of a pause in rate hikes as the Fed assesses the economic impact of previous tightening,” said Rousseau.

Next week, the U.S. Bureau of Labor Statistics will release two inflation readings for April: the Consumer Price Index (CPI) and the Producer Price Index (PPI). This might cause another shift in the macroeconomic narrative.

The market is projecting that headline CPI will stay at 3.5% in April, while PPI will marginally increase to 2.2% from 2.1%.

The U.S. Census Bureau released the April retail sales data. Following March’s 4% increase, markets are projecting 3.8% yearly growth.

According to Marc Dizard, chief investment strategist at PNC Financial Services’ PNC Asset Management Group, this week’s release of the inflation data for April will test the recent surge in U.S. equities.

Investors will likely confirm fewer Federal Reserve (Fed) rate cuts this year if inflation exceeds expectations, he said. “Current market expectations are undecided between one or two cuts from the Fed.”

Until further information becomes available, ClientFirst Wealth Management founder Edward P. Mahaffy suggests that investors spread their money among different securities and time periods. “One thing is certain: With $6 trillion on the sidelines, any sign of inflation abating could ignite one heck of a rally,” according to him.

 

Rousseau asserts that a robust liquidity cycle and robust corporate earnings sustain the bull market in the stock market. He asserts that the sell-off in May appears to have concluded in April, and we are currently witnessing a resurgence in buying that could potentially trigger a gradual surge in risky assets during the summer.

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