As last we left off in our ongoing saga of the stock market, inflation and our economy, Q1 had ended on a somewhat high note and things looked relatively stable. I was fairly confident about the state of our economy, the health of corporate America (vis a vis earnings), inflation and even my beloved Giants. Then April decided to throw us a proverbial curveball and nearly all indices were negative (with the lone exception of emerging markets) for the month. (Oh, and the Giants stunk too.)
Unfortunately, our old nemesis inflation reared its ugly head once again. As you may recall, our friends at the Fed had been indicating that they would lower interest rates in May if inflation data improved or at the very least remained steady. The stock market loved this idea and the market subsequently took off. However, after three consecutive months of lackluster inflation data, those cuts are off the table for the foreseeable future. As you can tell by the above chart, the stock market did not love that idea.
Adding to the pressure of the hotter than expected inflation print was a seemingly impossible to slow down labor market. With unemployment at a historically low 3.8% the Fed seems to be caught between a rock and a hard place trying to fulfill their dual mandate of maximum employment and stable prices. How can they calm down a suddenly hot inflation number, while not causing major unemployment problems?
Right now, the answer seems to be patience - the Fed likely won't move rates up or down for the time being. Ultimately, we are in wait and see mode and the Fed hopes that both inflation and unemployment can cool down on their own with no additional intervention. Wishful thinking or a shrewd call? Obviously, only time will tell.
Regular readers of this newsletter likely know what my final topic of the post will be...drumroll please...yes, you guessed it...corporate earnings! Perhaps miraculously, earnings continue to be steady if not spectacular with the S&P 500 reporting a cumulative net-margin of 11.5% for Q1 2024 thus far. This number is on par with both the 1 year and 5 year averages. Needless to say, stable earnings are better than declining earnings!
All things being equal, I don't believe that the modest pullback in April was a huge cause for alarm - but I am in the camp that as inflation goes, so too does the stock market. I actually think the Fed has done a good job of maneuvering between intervention (raising rates) and perseverance over the past few years (no major recession) so I actually have faith that they will get this call right too - as always, stay tuned.
Fingers crossed for better news next month. Until then, take good care!
Steve