Stocks tried to rally back Thursday on the good news from the uber-impressive NVDA earnings report propelling shares to even greater height.

Unfortunately, the strength of NVDA is really only of benefit to a very small group of stocks associated with AI…and not really representative of the full economy.

That is why 15 minutes after the open a sell off ensued as the PMI Flash report was MUCH HOTTER than expected. Meaning that inflationary pressures persist pushing up bond rates…and pushing the market considerably lower.

Let’s dig in more on this recent spate of news and what it means for the market outlook and trading plan from here.

Market Commentary

As is becoming far too common, traders have been too optimistic about the odds of rate cuts on the way in July or September. That was the resounding message from the 5/1 Fed meeting minutes released Wednesday afternoon leading to a spike in bond rates and a sell off for stocks with the S&P 500 (SPY) backtracking towards 5,300.

Basically, inflation is too persistent leading them to keep higher rates for longer (which they keep telling us, but people keep not listening). And that it may even take raising rates a notch more to be the final death blow to high inflation to get back on track to 2% target.

So even though NVDA wowed the crowd on Thursday morning, it didn’t take long for reality to set in with the broader market sinking into the red. I am talking about when the PMI Flash report at 9:45am 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 to the first week of the month when the more widely followed ISM Manufacturing and ISM Services reports are issued. Yet it was hard not to notice the surge in economic activity in this report that will likely be echoed in the ISM versions in two weeks.

Normally we celebrate positive economic news…but not when you are in the midst of fighting high inflation. As that increase in activity equates to higher inflationary pressures that will likely show up in the next round of inflation reports.

Bond investors got the memo immediately as you will see in this intraday chart of the 10 year treasury that spiked right as this news came out.

And that timeline of 9:45am ET coincides with when the Russell and Dow dropped into negative territory and descended further and further into the finish line.

The July 31^st Fed meeting has gone from 47% probability of a cut down to 13%. Whereas the September 18^th meeting still stands at just over 50% probability of a rate cut when that was a 73% certainty not that long ago.

In talking with some of my investing friends, they discussed how most investors are not truly prepared for the “higher for longer” theme to play out. That conversation was on Tuesday morning and the subsequent data only confirms that notion that investors are still a touch too optimistic about the timing of rate cuts and perhaps should reconsider their investment strategy.

Don’t worry…neither I or any of the aforementioned investing friends are in the bear camp. Rather, we think that overall stock prices are ahead of the fundamentals at the moment leading to the risk of more near term downside than upside as investors have to recalibrate how far it will truly be til the first rate cuts are in hand.

These upcoming economic reports will shine more light on that. So let me repeat what I had in my last commentary:

“5/31 PCE: This is the Fed’s favorite measure of inflation. If it corresponds with improvements found in last week’s CPI report, then could provide a nice boost for stocks. On the flip side, bad news here will have stocks pulling back from recent highs.

6/3 ISM Manufacturing: The first of the big three economic reports that kick off each month. This area has been weak for a long time. Oddly, investors would not want this to heat up as it would signal inflationary pressure. So, a 50 or below reading would be the most welcome news.

6/5 ISM Services: This large swath of the economy has been heading lower for 3 straight readings with the first sub 50 showing in early May which helped propel stocks higher (because it equates with lower inflationary pressure). So here the goldilocks reading would be around 50 to not stoke fears of sinking into recession nor heating up to push inflation higher.

6/6 Government Employment Situation: No one is worried about unemployment at this time. The main fixation from this monthly report will be the results for Average Hourly Earnings (aka wage inflation). This aspect has been far too sticky, which the Fed watches carefully. Gladly there were signs of easing in the early May report and the hope is that continues in this early June reading.”

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

The further out that the first rate cut gets pushed…the more likely we are to endure a 3-5% pullback in the overall market. Not too scary when you consider the gains already in hand.

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

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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 $527.81 per share on Friday morning, up $1.85 (+0.35%). Year-to-date, SPY has gained 11.39%, 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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