Obscure Economic Report Spoils Stock Market

2024-05-25 02:24:19 Eastern Time

Just as investors were celebrating the good news brought by NVDA earnings... came news of better-than-expected economic growth from a typically little-watched economic report. Next thing you know, bond rates are rising and the S&P 500 (SPY) is falling more than 1% to recent highs to well below 5,300. It's important that you understand what happened and why to appreciate what it means for stocks in the days and weeks ahead. Keep reading below for the full story...

Stocks attempted to rally Thursday on good news from NVDA's impressive earnings report, which propelled the stock to even higher heights.

Unfortunately, NVDA's strength really only benefits a very small group of stocks associated with AI... and isn't really representative of the entire economy.

That's why 15 minutes after the open a sell-off occurred when the preliminary PMI report came in MUCH HOTTIER than expected. Which means inflationary pressures persist, driving up bond rates...and pushing the market considerably lower.

Let's dive deeper into this recent series of news and what it means for the market outlook and trading plan from here.

Market Comment

As is becoming all too common, traders have been overly optimistic about the chances of rate cuts in July or September. That was the strong message from the 1/5 Fed meeting minutes released Wednesday afternoon, prompting a spike in bond rates and a sell-off in stocks in the S&P 500 (

TO SPY

) retreating towards 5,300.

Basically, inflation is too persistent, which leads them to keep rates higher for longer (which they keep telling us, but people still don't listen). And it may even be necessary to raise rates a little more to be the final blow to high inflation and get it back on track towards the 2% target.

So while NVDA wowed the crowd on Thursday morning, it wasn't long before reality set in and the broader market sank into the red. I'm referring to when the preliminary PMI report at 9:45 am ET came in well above expectations at 54.4, when only 51.1 was expected.

Typically, this report is not a market-moving event, as many wait until the first week of the month, when the more closely watched ISM Manufacturing and ISM Services reports are released. However, it was hard not to notice the increase in economic activity in this report that will likely be reflected in the ISM releases in two weeks.

We normally celebrate positive economic news... but not when you're battling high inflation. Since that increase in activity equates to higher inflationary pressures that will likely appear in the next round of inflation reports.

Bond investors got the memo immediately, as you'll see in this intraday chart of the 10-year Treasury that spiked just as this news broke.

And that 9:45 a.m. ET timeline coincides with the time when the Russell and Dow fell into negative territory and descended further toward the finish line.

July 31
^street
The Federal Reserve meeting has gone from a 47% chance of a cut to 13%. While on September 18
^th
The meeting still has a little more than 50% probability of a rate cut, when not long ago that probability was 73%.

In talking to some of my investor friends, they commented that most investors aren't really prepared for the "higher for longer" theme to play out. That conversation took place on Tuesday morning and subsequent data only confirms that notion that investors are still too optimistic about the timing of rate cuts and should perhaps reconsider their investment strategy.

Don't worry...neither I nor any of the aforementioned investor friends are in the bearish camp. Rather, we believe that overall stock prices are ahead of fundamentals at the moment, creating more downside risk than upside in the near term as investors have to recalibrate how far they will actually be until the first rate cuts are available.

These upcoming economic reports will shed more light on this. So let me repeat what I had in mind

my last comment

:

“

5/31 PCE

: This is the Federal Reserve's favorite measure of inflation. If it matches the improvements found in last week's CPI report, then it could provide a nice boost for stocks. On the other hand, bad news here will cause the stock to pull back from recent highs.

Manufacturing ISM 6/3

: The first of the three major economic reports that begin each month. This area has been weak for a long time. Interestingly, investors would not want this to get hot as it would be a sign of inflationary pressure. Therefore, a reading of 50 or less would be the most welcome news.

6/5 ISM Services

: This large swath of the economy has been falling for 3 consecutive readings, with the first below 50 in early May, which helped push stocks higher (because it equates to lower inflationary pressure). So the ideal reading here would be around 50 so as not to stoke fears of sinking into a recession or heating up to push inflation higher.

6/6 Government Employment Status:

No one is worried about unemployment right now. The main focus of this monthly report will be the results of average hourly earnings (also known as wage inflation). This aspect has been overly complicated, something the Federal Reserve is watching closely. Fortunately, there were signs of easing in the early May report and we expect that to continue in this early June reading.”

In the long term we are in a bull market. But with gains of 50% from the bottom just 19 months ago, then easy money has already been made. Now is the time to withdraw profits from overly congested positions and reallocate them to those that offer more value and upside potential.

The further away we get from the first rate cut... the more likely we are to see a 3-5% pullback in the broader market. Not too scary considering the achievements that have already been made.

In fact, you should simply think of it as an opportunity to buy the dip in your favorite stocks at even better entry prices. As always, I hope you'll focus on the best stocks based on our POWR Ratings to guide your path. My favorite POWR Rating stocks are discussed below...

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Steve Reitmeister

…but everyone calls me Reity (pronounced “Righty”)

CEO of StockNews.com and

Editor, Reitmeister Total Return

SPY stock was trading at $527.81 per share on Friday morning, up $1.85 (+0.35%). So far this year, SPY has gained 11.39%, versus a percentage increase in the benchmark S&P 500 index over the same period.

About the author: Steve Reitmeister

Steve is better known to the StockNews audience as "Reity." Not only is he the CEO of the company, but he also shares his 40 years of investing experience in the

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