Stocks were already bouncing from the lows of the April pullback before the positive CPI report rolled in. That was all investors needed to get back in a buying mood with the S&P 500 (SPY) leaping to new highs above 5,300.

For as much as I want to celebrate this good fortune, I just can’t help but to reflect on some of the negatives I see that could make this rally short lived. That review will be the focus of today’s commentary.

Market Commentary

Wednesday provided a very pleasing CPI report that was lower than expectations on both the month over month and year over year readings. This coincided with a lower than expected Retail Sales report.

Normally investors would not cheer news of weak retail results. But the key to lower inflation is to lower demand. Thus, a worse than expected Retail Sales report implies that indeed demand is weakening which should further ease inflationary concerns.

This set into motion a very positive chain reaction:

Lower bond rates > higher probability of first Fed rate cut September > stocks soaring to new heights.

Let’s break all that down.

10 year bond rates were pushing up to 4.7% just a few weeks back on worse than expected inflation data. Now they have made a strong move down to 4.38% as of Thursday’s close. In fact, at every interval of the bond term ladder we saw rates head lower.

This easing of bond rates coincides with an increased probability of the first Fed rate cut coming at the September 18^th meeting. Now investors see that as a 67% liklihood.

This all became a catalyst for stocks to break to new highs above the previous mark of 5,265.

Moving Averages: 50 Day (yellow) @ 5,155 > 100 Day (orange) @ 5,032 > 200 Day (red) @ 4,734

This all sounds quite positive. And I perhaps I would better served just celebrating our good fortune.

However, I am a student of history. And one does not have to go that far back in the memory banks to realize that many traders thought the end of 2023 was going to be the spot of the first rate cut. And have been wrong pretty much every step since then.

The point being that traders have no patience. Like a teenager loaded up on 3 Red Bulls while playing Call of Duty with their friends.

This is quite a juxtaposition versus the stoic and learned academics who lead the Federal Reserve.

Powell could not be clearer that they will continue to be patient on making the first move. They would rather be too late than too early. Especially because inflation results are very lumpy….like the poor results in April that led to the recent stock market correction.

Then you have the idea of sticky inflation which is shared in great detail by the Atlanta Fed. Their analysis of new CPI data on Wednesday showed that sticky inflation (mostly housing and wages) is still at 4.6%…that is far too high.

It is called sticky inflation for a reason, because it sticks around longer than you think and is not so easily dispensed with. Traders are not looking at that info, but Fed officials most certainly are which I think would lead many of them to hesitate on rate cuts longer than traders currently appreciate.

I say all this to mean that this rally will fizzle out at the next sign of poor inflation data or hawkishness on the part of Fed officials. So, we could go a shade higher. But all in all I see a bit more downside risk than upside in the next few months.

Yet, in the long run I still very much see this as a bull market with 5,500 year end target in 2024 and moving up to 6,000 next year.

Thus, I recommend staying fulling invested. But would not be as gung ho bullish on growth stocks as the recent rally would imply.

Still believe at current levels that having a solid allocation (30-50%) to value stocks and those with defensive qualities will prove beneficial. But because the next bull run can emerge at any time for any reason, then the rest of the portfolio can be on growth stocks trading at reasonable valuations (GAARP investing).

This provides upside on bull runs as well as less beta and volatility if and when a pullback occurs.

Pulling back to the big picture…trying to perfectly time the market is a fool’s errand. Thus, best to appreciate that it’s a bull market til proven otherwise and that is why best to still be 100% invested.

Yet given the facts in hand about inflation, along the Fed’s greater patience than most appreciate…that is why I am recommending a slightly more conservative approach.

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

SPY shares fell $0.01 (0.00%) in after-hours trading Thursday. Year-to-date, SPY has gained 11.58%, 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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