Stocks are enjoying a nice bounce in early May after a pretty brutal April. Some point to good news from corporate earnings. And others point to good news on the inflation front leading to the first Fed rate cut. This has the S&P 500 (SPY) pushing up closer to the all time high.

Before you get too excited, probably best that you read the rest of my Reitmeister Total Return commentary today to appreciate what most likely lies ahead for investors.

Market Commentary

The May 1^st Fed meeting reset everyone’s expectations to be more patient waiting for rate cuts because high inflation is not going quietly into that good night. And thus the Fed will need more convincing proof it is on path to reach 2% target before lowering rates. (More thoughts on the Fed meeting in my previous commentary).

Just 2 days later investors got giddy with the weaker than expected Government Employment Situation report with nearly 30% less jobs added than expected. This included a tick up in the unemployment rate to 3.9%.

Even more beneficial was the Average Hourly Earnings reading of just +0.2% month over month. Not only was that lower than expected, but annualized getting much closer to the 2% inflation target from a reading that was stuck closer to 4% or more for the past year.

Just a couple hours afterwards the ISM Services report showed the first contraction since December 2022. Normally that unexpected sub 50 reading (49.4) would be cause for concern that the odds of recession may have increased.

On the other hand, any easing of the economy will help tame inflation. Plus, the Fed does not want the economy to tip over into recession. Either way you slice it no doubt makes the Fed more prepared to cut than was stated at the 5/1 press conference.

The sum total of this news had bond rates falling > stock prices rising > and yes, odds for future rate cuts increasing.

The July 31^st Fed meeting has increased to 32% odds of the first rate cut from only 23%. (Don’t count on this being the start of cuts).

The September 18^th meeting is now the true epicenter of the rate hike debate with odds now at 66% probability up from 46% just a week ago.

No doubt the release of the PPI report on 5/14 followed by CPI on 5/15 will rejigger odds once again. My overall sense is that investors are getting ahead of themselves once again not appreciating the patience the Fed has shown to date…and will continue to show into the future.

Price Action & Trading Plan

Early May has provided some welcome relief to the pain investors felt in April as you can see in the chart below:

Moving Averages: 50 Day (yellow) @ 5,134 > 100 Day (orange) @ 4,996 > 200 Day (red) @ 4,710

The weakness in April only led to 1 close below 5,000 and now we are 4.44% above that low. Even more impressive is the 6.29% bounce from bottom for the small caps in the Russell 2000.

Before sounding a “Mission Accomplished” banner on this recent pullback I should note that we are still in the midst of the traditionally lackluster summer season for stocks. On top of that there are still big question marks looming over inflation and when the Fed will feel comfortable lowering rates.

Then just to put an exclamation point on the uncertainty, we have the Presidential election in November. Typically, somewhere between July and September on election years we see a notable correction forming for the overall market that leads to a big rally after the election is settled (no matter which party is elected).

This fits under the heading that investors hate uncertainty. This causes investors to sell based upon the uncertainty coming into the election and then rally on the certainty that comes from a winner emerging.

This is a very silly process when you think about it because a winner will always emerge…so why slump before hand? But it is such a time-honored tradition that it most likely will happen again this year.

The point being that we have at best we are in the midst of a trading range framed by 5,000 on the low side and the previous peak of 5,265 on the high side.

At worst, perhaps explore down towards the 200 day moving average which is rising day by day. So, let’s say about 4,800 on the downside.

That is not so scary when you consider the gains that have rolled in since the October 2022 low of 3,491. Just time to give a touch back before gaining strength for next leg higher.

5,500 is still my upside target coming into year end with the election settled plus the typical Santa Claus rally. Then 6,000’ish a realistic goal in 2025.

That means it is wise to take advantage of any forthcoming dips to load up on the best stocks for the eventual push higher. In the meantime, a more conservative mix of stocks is wiser to reduce volatility. Emphasis on larger stocks in more defensive industries.

We have done well to load up on more of those types of stocks in Reitmeister Total Return which continues to propel our outperformance this year.  More details on that below…

What To Do Next?

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Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

SPY shares were trading at $517.14 per share on Tuesday afternoon, up $0.57 (+0.11%). Year-to-date, SPY has gained 9.14%, versus a % rise in the benchmark S&P 500 index during 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 firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...

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