Wall Street Continues to Wait for Godot

Investors are eagerly awaiting Friday’s inflation data and impending speeches from Federal Reserve officials for any indications on the potential timing of interest rate reductions.

Wall Street has been desperate for the Fed to cut interest rates. However, waiting for the Fed’s dovish pivot resembles “Waiting for Godot,” an absurdist play in which the protagonists spend all their time trying to meet the mysterious Godot…who never shows up.

The playwright Samuel Beckett is making a metaphorical statement about God. (Let’s put all that aside and stick to monetary policy.) In recent months, rate cut expectations for 2024 have gone from six cuts down to three and currently down to one or two. The hard-core pessimists are arguing that we won’t get a cut this year at all.

The timing for the first cut has moved from March to June and currently to September…or maybe even as far out as December.

Monetary policy remains the crucial backdrop for the stock market. Am I weary of writing about the Fed? Sure, but there’s no choice. Liquidity is the lifeblood of equity markets and the central bank controls the liquidity spigot. Don’t fight the Fed, as the saying goes.

In the commodities market, oil prices are rebounding, spurred by escalating geopolitical tensions in the Middle East. Despite these recent gains, oil prices remain around $80 per barrel, staying within the range observed over the past year.

The excitement surrounding artificial intelligence (AI) propelled the tech-heavy NASDAQ to record highs last week, reversing the stock market’s April downturn.

Nvidia (NSDQ: NVDA), a front-runner in the AI industry, has seen its shares soar after surpassing high expectations, demonstrating robust demand for AI computing. AI holds significant potential to enhance productivity across various economic sectors, though widespread adoption will take time.

Currently, the primary beneficiaries are the enablers of AI technology. However, as these innovations are integrated into existing processes, a broader range of companies is expected to benefit.

While technology sector innovation continues to thrive, the importance of diversification should not be overlooked.

This month, the technology sector has led market performance, but the stock market’s overall gains are more widespread compared to last year, with 10 out of 11 sectors showing positive returns, with energy being the sole laggard.

International equity markets, particularly in Europe, the United Kingdom, and China, are also showing strong performance, sometimes even outpacing the S&P 500, buoyed by a weakening U.S. dollar and improving global growth.

This week, the economic calendar is relatively light, but all eyes are on Friday’s core personal consumption expenditures (PCE) inflation data, the Fed’s preferred inflation gauge.

The Fed pays particularly close attention to the core PCE, because it conveys a better long-term indicator of where inflation is headed. The core reading strips out food and energy prices, which can be volatile over shorter time periods.

Analysts predict a 0.2% month-over-month rise in the PCE for April, following a 0.3% increase in March, keeping the annual rate steady at 2.8%.

Although inflation progress stalled in the first quarter, the overall downward trend suggests that the Fed will implement one or two rate cuts in the latter half of the year. Maybe.

This cautious optimism has helped keep the S&P 500 above its major moving averages, as reflected in the following price chart of the benchmark SPDR S&P 500 ETF (SPY):

However, uncertainties surrounding future Fed policies and the upcoming U.S. presidential election in November could introduce market volatility in the coming months. The Trump-Biden rematch has Wall Street grinding its teeth.

The bloody horrors of Gaza and Ukraine also are keeping investors on edge. The conflicts are exacerbating superpower tensions and threaten to spread into adjacent territories. Even worse, Russian President Vladimir Putin continues to rattle his nuclear saber.

Despite these potential disruptions, my outlook remains optimistic for the stock market, due to rising corporate profits, ongoing economic expansion, and the prospect of lower yields later in the year.

The main U.S. stock market indices closed lower Wednesday as follows:

  • DJIA: -1.06%
  • S&P 500: -0.74%
  • NASDAQ: -0.58%
  • Russell 2000: -1.48%

Rising bond yields offset enthusiasm over technology, with the benchmark 30-year U.S. Treasury yield jumping 1.89% to settle at 4.74%.

Of course, all bets are off if we get a “black swan.” The insidious aspect of a black swan is that no one ever sees it coming. Stay diversified.

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John Persinos is the editorial director of Investing Daily.

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