Stocks Gain with CPI Inflation Data on Deck

Performance for Week Ending 5.10.2024:

The Dow Jones Industrial Average (Dow) gained +2.16%, the Standard & Poor’s 500 Index (S&P 500) added +1.85% and the Nasdaq Composite Index (NASDAQ) rose by +1.14%. Sector breadth was positive with all 11 of S&P sector groups closing higher. The Utilities sector (+4.03%) was the best performer followed by Financials (+3.07%) and Materials (+2.58%).

*See below for Index Definitions

MARKET OBSERVATIONS: 5/6/2024  – 5/10/2024

The S&P 500 finished higher for third straight week with the broader market index now just over 31 points away from hitting a fresh all-time closing high. Driving the gains in recent weeks has been a slight cooling in economic data that has fueled expectations the Federal Reserve will begin cutting rates later this year. This has been set against a strong environment for corporate earnings which collectively has bolstered investor sentiment. In terms of interest rate cuts, Bloomberg’s World Interest Rate Probability tool, shows traders are currently pricing in 41 basis points of rate cuts by the end of 2024, with the first cut seen at the September Fed meeting.

Fedspeak: Higher for longer continued to be the ongoing chorus from the choir of Fed speakers last week. Richmond Fed President Thomas Barkin said he expects high interest rates to slow the economy further and cool inflation to the central bank’s 2% target. “I am optimistic that today’s restrictive level of rates can take the edge off demand in order to bring inflation back to our target,” Barkin said, adding “the full impact of higher rates is yet to come.” Minneapolis Fed President Neel Kashkari said it’s likely the central bank will keep interest rates where they are “for an extended period of time” until officials are certain inflation is on track to their target. Boston Fed President Susan Collins signaled interest rates will likely need to be held at a two-decade high for longer than previously thought to damp demand and reduce price pressures. Collins, who noted the lack of disinflationary progress made in 2024, said slower economic growth will be necessary to make sure inflation remains on a sustainable path to the Fed’s 2% goal. San Francisco Fed President Mary Daly said interest rates are currently restraining the economy, but it may take “more time” to return inflation to the central bank’s goal. “We are restrictive, but it might take more time to just bring inflation down,” Daly said during a moderated discussion, echoing remarks Fed Chair Jerome Powell made on April 16.

Economic Roundup: As is typical in the week that follows the monthly payroll report, the data calendar was relatively light. The Labor Department reported that initial jobless claims in week ended May 4, rose to the highest level since August, consistent with signs of gradual cooling in the labor market. Initial claims increased by 22K to 231k. The four-week moving average—which helps smooth week to week volatility—increased to 215K, the highest since February. Up until this latest week, first-time applications had been confined in a narrow 200K-222K range for the last three months. Meanwhile, mortgage rates in the fell, switching direction after five weeks of increases. The average for a 30-year, fixed loan was 7.09%, down from 7.22% last week, according to Freddie Mac. Late in the week, the closely watched University of Michigan Consumer Sentiment report showed a plunge in sentiment in early May. The headline sentiment index fell to 67.4 from 77.2 in April, the lowest level since last November. According to the press release from the organizers of the survey, consumers had been reserving judgment for the past few months, however they now perceive negative developments on a number of dimensions. They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.

Q1 EPS Season: With of 90 percent of S&P 500 members having already released results, the earnings calendar will start to move to the backburner. Through Friday, 459 members of the S&P 500 have released results with just under 80% beating expectations. Aggregate earnings for this group are up 5.5%, solidly of expectations at the start of earnings season. The high beat rate coupled with the better than feared results has led to upward earnings revisions, with analysts now expecting 7.1% growth for the overall quarter. On the sector front, the strongest growth has come from Communication Services (+41.7%) followed closely behind by Consumer Discretionary (+41.3%). On the flip side, Healthcare (-26.2%) and Energy (-25.7%) have posted the weakest results.

The Week Ahead: The focal points of this week’s data calendar will be the Consumer Price Index (CPI) and the Retail Sales data, both due out Wednesday morning. The reports will give investors insight on both inflation and the health of the US consumer. In terms of the CPI report, economists (via the Blomberg consensus) expect the headline gauge to come in at +0.4% month-over month (m/m) and the core indicator to print +0.3% m/m. On a year over year basis the headline CPI is forecast to come in at +3.4% (down from +3.5% in March) and the core rate—which exclude food and energy—is expected to dip to +3.6% from +3.8% in March. Other data of interest on the economic calendar includes the Producer Price Index (Tuesday), the Empire Manufacturing Index (Wednesday), Jobless Claims and Housing Starts (Thursday), and the Leading Economic Indicators data on Friday. Earnings season will continue to wind down with just 7 members of the S&P 500 scheduled to report. Reports of note include Home Depot, Walmart, Cisco Systems, and Deere & Company. On the central bank front, the spotlight will be on Fed Chair Powell speaking on Tuesday. Besides Powell, nine other members of the Fed are slated to speak throughout the week.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.