April was the first month in the red for the S&P 500 (SPY) since October 2023. That is not so scary on its own. But what does concern investors is the recent stronger than expected inflation readings that calls into question when the Fed will finally start cutting rates.

Today in the Reitmeister Total Return commentary we are going to read the tea leaves from April to see what it tells us about the market in May and beyond.

Market Commentary

Tuesday offered up 2 lesser followed economic readings that foreshadow not so welcome news for other more widely followed reports. Let’s start with the +1.2% quarter over quarter inflation reading for the Employment Cost Index.

For those doing some quick “back of the napkin” math that is far too close to 5% annual pace which is far too hot more than 2 years into the Fed’s hawkish rate hiking regime. This doesn’t bode well for what we should expect this coming Friday when investors get served up the more widely appreciated Government Employment Situation report where folks will dial into the Wage inflation component.

Further on Tuesday the Chicago PMI report plummeted to 37.9 when 45.0 was expected. This is considered the most vital regional manufacturing report that often points the way for what we will see in the national ISM Manufacturing report (coming out Wednesday morning).

Yes, one can say that manufacturing has been in a slump for quite some time. But directionally this is far softer than expected and the 5^th straight decline. This has me greatly doubting the 50.0 expectation for ISM Manufacturing on Wednesday.

It is true that some investors have been celebrating weak economic reports as it would translate into softening of inflationary conditions. That does not seem to be the case right now which economists might say could lead to another unsavory economic climate known as Stagflation.

Stagnant economy + high inflation = Stagflation = think of the early 1970’s when oil prices spiked and the economy went flat.

I wouldn’t worry too much about that right now. Just an idea to keep in the back of our minds if inflation doesn’t get back on the glide path towards the Fed’s 2% target.

Let’s review some other noteworthy events on the horizon.

5/1 Fed Meeting: It has been clear for a while there will be no rate cut coming at this meeting. However, investors will go over every comment with a fine toothed comb looking for any clue that shines a light on when the first rate cut might happen. And whether Fed official still predict 3 in total this year. Given recent, more hawkish, comments from Powell they will want to see what his tone tells us about what comes next.

5/3 Government Employment Situation (with focus on Wage Inflation): As noted earlier, Tuesday’s not so welcome increase in quarterly employee cost data will have many eyes on the Wages component of this report. Of course, jobs added is also an important factor. But with 238K expected, even coming in a tad shy of that would still be a positive for the employment picture.

5/14 PPI & 5/15 CPI: Given the recent increase in the PCE inflation reading, investors will be very keen to see what these reports tell us about the path of inflation and likely Fed actions. Right now investors are a bit more prepared for inflation to be too strong. Thus, any positive news should have stocks bouncing back from recent weakness.

Earnings Season: We are already at the half way mark and this has been a nicely better than expected earnings season overall. 80% of companies have beaten expectations which is better than normal. The best news is that earnings estimates are on the rise for subsequent quarters which was not the case after the last few earnings seasons. So this points to a general improvement in the earnings picture. When coupled with the pullback in stock prices it also improves the valuation story for stocks that was starting to get a little bit stretched when pushing above 5,200.

Price Action & Trading Plan

Here is where the market stands now at the end of April (the first down month since October 2023):

Moving Averages: 50 Day (yellow) @ 5,128 > 100 Day (orange) @ 4,971 > 200 Day (red) @ 4,696

Stocks have been playing in a range between the 50 day and 100 day for the past few weeks. And now the 100 day is moving ever closer to fusing with 5,000 to form a serious level of support.

My gut tells me to get used to clinging to the bottom of this range, maybe even exploring a little below, until the inflation picture improves and the Fed looks ready to cut rates. And on that front, it is quite possible that there is just 1 or even no rate cuts this year thus delaying the next bull run higher.

This has me still fully invested in the market…just sprinkling in a few more defensive selections to provide a better night’s sleep in the midst of the volatility. Then lining up my radar screen with my favorite growth picks that I would like to snap up at even better discount prices.

This strategy has the Reitmeister Total Return portfolio on the right side of the market action so far this year. Learn more about 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 $501.98 per share on Tuesday afternoon, down $8.08 (-1.58%). Year-to-date, SPY has gained 5.94%, 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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