With no recession in sight, and another strong earnings season in hand, then all that really matters for investors is when the Fed will finally lower rates. That catalyst should cause this nice chain reaction:

faster economic growth > higher corporate earnings > rising stock prices

So, let’s check out the economic calendar to pinpoint the next clues that tell us something about future Fed actions. Also, we will talk about how the recent pullback puts stocks in a healthier place going forward.

All that and more is in store for this week’s Reitmeister Total Return commentary.

Market Commentary

If the key to future stock prices is when the Fed will first cut rates, then best that we review the economic calendar for events that could influence their decision:

4/25 & 4/26 Personal Consumption Expenditures (the Fed’s favorite inflation index) is shared over 2 days. First the quarter over quarter readings that come out with GDP reading this Thursday. Then on Friday we get the month over month and year over year tally. The Core reading is supposed to continue on the decline path from 2.8% to 2.7%. Any stoppage or detour on that downward path will be very unwelcome.

5/1 Fed Meeting: No one is holding their breath for a rate change here. The key will be language from the Fed showing if they are indeed becoming less dovish as appeared to be the case with recent comments from Powell. His answers at the press conference will be put under a microscope for close examination.

5/3 Government Employment Situation (with focus on Wage Inflation): Housing and wages are the main elements inside the concept of “sticky inflation”. And as stated many times by Fed officials, it is still too sticky. So, we want to see continued downward pressure on this reading to start increasing the odds of a pending rate cut.

5/14 PPI & 5/15 CPI: These are the 2 most widely followed inflation reports (even though the Fed keeps telling everyone to focus on PCE). The stronger than expected readings for CPI last month was a big part of the market finding a top leading to the recent pullback. Thus, we want to see this get back on a glide path towards the 2% Fed target.

Given the current facts in hand, no one is expecting the first rate cut on May 1^st. That only increases to 17% chance for the June 12^th meeting.

July 31^st is considered in play at 48% chance of a cut. Funny how that was at 87% odds back a month ago. As we move out to September 18^th we move towards 73% odds of a rate cut in hand.

With that backdrop in place, let’s now talk about…

Price Action & Trading Plan

Stocks endured a long overdue pullback from recent highs. Plain and simple, investors got overzealous bidding up stock prices assuming that rate cuts would be earlier this year.

Unfortunately, as still high inflation facts kept rolling in, and the first Fed rate cut was pushed further out into the future, then investors realized it was time to take some profits off the table.

Moving Averages: 50 Day (yellow) @ 5,119 > 100 Day (orange) @ 4,944 > 200 Day (red) @ 4,680

As you will see in the chart above, the S&P 500 (SPY) fell almost 6% from top to last week’s bottom. That is a healthy pullback given the tremendous gains that have accrued over the last several months.

The best news is that many overpriced and overhyped stocks saw stiffer 10-20% haircuts which properly brings them down to size. That was especially true in the tech space that has had a grand ol’ time going back to the bear market low of October 2022.

The bounce early this week is to be expected as we broke below the psychologically important 5,000 level and took a shot down towards the 100 day moving average where there was ample support. The greater question is how many times we will test these lower levels until stocks are ready for the next serious bull run to new heights.

The likely catalyst for that breakout is when inflation data starts coming down in earnest on trajectory towards the Fed’s 2% target. When that happens bond rates will drop and stocks will rise in anticipation of the first Fed rate cut.

My guess is that we will not take out the current high of 5,264 without that rate cut being in hand. That’s because there have been too many Fed meetings in play expecting a cut where it did not take place. I suspect investors will hold back the celebration til that rate cut is truly in hand.

With July 31^st being the current expected first rate cut, then that gives plenty of time to chop around in a trading range. Any bad news on inflation, middle east tensions, banking issues or any other negative will have us testing the lows once again. Perhaps even a shot down closer to the 200 day moving average.

I would use all such occasions as “buy the dip” opportunities. That’s because until there is a recession to worry about, then we are still very much in a bull market awaiting a great catalyst in Fed rate cuts. So, all price declines will be temporary and thus great opportunities to load up for the eventual ride higher.

In the next section you will discover my 12 favorite stocks to thrive in this environment…

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 $505.65 per share on Tuesday afternoon, up $5.93 (+1.19%). Year-to-date, SPY has gained 6.71%, 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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