High inflation refuses to “go quietly into the night”.

Instead, the most recent CPI report was too hot which greatly downgraded the odds of a rate cut coming in June or July. With that bond rates went higher on Wednesday and stock prices went lower.

Thursday’s PPI report was a bit tamer helping to ease the mood. But it does cloud the outlook for the market.

So, we will do our best to shine some light on our path forward from here in today’s commentary.

Market Commentary

April started with a very mild sell off which seems quite natural given then rapid pace of gains in Q1. Then just as stocks were bouncing back towards the highs we got served up a unwelcome CPI report on Wednesday that had investors hitting the sell button once again.

Unfortunately, year over year inflation increased from a 3.2% reading last month to 3.5% this time around. Yes, that is the wrong direction as we want to continue on our glide path towards the Fed’s target of 2%.

We all know that inflation rarely moves in a straight line. But this was not the first inflation report above expectations…but it certainly was the most resounding negative that investors could not dismiss.

The nerds out there (like myself) will note that the Sticky Inflation readings got even worse. That reading went up to 5% based upon the month to month change from the previous 4%. There is simply no way the Fed can look at this recent data and decide to lower rates in May…June…and probably not July.

The world of investors most certainly agreed with this notion given the seismic moves in the bond market. Most notable was the 10 year Treasury rate spiking to nearly 4.6% on Wednesday. That cooled down a notch on Thursday given the “slightly” better than expected reading for PPI.

This greatly changes expectations for the timing of the first Fed rate cut. A month ago there was 72% probability of that taking place in June. That is now down to 22%.

Moving out to July that was considered a near slam dunk at 90% odds of lower rates. That is now a coin toss at just 49% likelihood.

Finally, we see the September meeting coming in at 70% odds of lower rates. This all points to investors going over the May 1^st Fed testimony with a microscope looking for even the smallest clues of what comes next.

Long story short, I think it is borderline insane for investors to expect new highs for stocks until inflation is better under wraps and certainty increases on the timing of the first rate cut. That points to the recent high of 5,265 for the S&P 500 (SPY) as being the top end of current trading range.

The bottom of that range is a bit less clear. Will investors do more of a consolidation slightly under recent levels? The hearty bounce on Thursday seems to point in that direction. But the longer things go on without a resolution to the matter, the more we could break below the 50 day moving average at 5,105 and perhaps give 5,000 a serious test.

If that scares you, then might I recommend you put your money in the bank rather than the stock market.

The only way you can enjoy the reward of a 27% gain for the S&P 500 since late October is by taking the risk that comes with mild pullbacks and tougher corrections from time to time. Meaning that testing 5,000 or even lower would be a yawn in the history of stock market movements which has improved our net worth considerably over the past few months…years…decades…generations…and so on.

My trading plan is to remain bullish. Just have a better eye towards the value of your positions. If you wouldn’t buy more shares of those stocks today…then perhaps time to sell and add new stocks that you feel have better upside potential.

That also calls for a “buy the dip” mentality as there likely will be more volatility and rough sessions ahead. Those are the times to step in and add shares of your favorite stocks.

All in all, we are moving back to a more normal bull market. Where 2 steps forward and 1 step back is just part of the dance. So, all the more reason to find the beat and dance right along.

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 $515.01 per share on Friday morning, down $2.99 (-0.58%). Year-to-date, SPY has gained 8.69%, 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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