Stock Market Reality Check: Why The Bulls Hold Sway

As inflation cools and rate cut hopes push U.S. stocks to record highs, you’d think there’d be dancing in the streets. Instead, Wall Street’s euphoria stands in stark contrast to Main Street’s gloom. Welcome to the economic paradox of 2024.

In previous Mind Over Markets columns, I’ve examined this “vibe-cession.” Political partisanship that creates an alternate reality is largely to blame. We’ve even seen the emergence of “inflation truthers” who argue that inflation is much worse than it seems because the government is cooking the books. There seems to be a conspiracy theory for everything.

If you want to undermine a society, you don’t necessarily need a powerful military. You simply need to inundate its people with misinformation that sows discord and encourages them to put idiots in charge.

Successful investors must ground their strategies in objective reality, meticulously analyzing data as it exists rather than through the lens of personal biases or desires. This disciplined approach requires setting aside preconceived notions and emotional inclinations to make decisions based on factual and current information.

By evaluating true market conditions, financial metrics, and economic indicators, investors can identify genuine opportunities and risks. This objectivity helps avoid costly mistakes that arise from wishful thinking, ensuring that investment decisions are rational, strategic, and aligned with actual market trends and data-driven insights.

Let’s roll up our sleeves and parse the latest numbers.

The U.S. job openings report for April suggests that companies are pulling back on their hiring sprees, and that’s good news for inflation fighters…which in turn is good news for stock market investors.

There were 8.06 million available jobs posted in April, according to the U.S. Bureau of Labor Statistics’ latest Job Openings and Labor Turnover Survey (JOLTS) report released Tuesday. That’s below the downwardly revised 8.36 million witnessed a month before and the lowest since February 2021 (see chart).

Investors eagerly await more labor-market data this week, including the ADP private-employment report and the highly anticipated U.S. nonfarm-jobs report on Friday.

Labor market data might show signs of cooling off, but it’s worth remembering that it’s cooling from a red-hot start. For instance, the unemployment rate is expected to be a robust 3.9% for May, a modest increase from last year’s low of 3.4%.

On the economic front, softer data and whispers of better inflation news have nudged bond yields lower. The 10-year U.S. Treasury yield has slid back to around 4.28% (at market close Wednesday), after peaking at about 4.70% in late April. This yield drop has given bond prices a much-needed boost and has also been kind to the equity market, with the S&P 500 bouncing up about 7% since its April dip.

Now, let’s talk about the Federal Reserve and its endless dance with interest rates. According to the CME FedWatch tool, markets are once again betting on two rate cuts by the Fed this year, probably in September and December.

This optimism stems from recent data suggesting the U.S. economy is taking a breather, with reports such as ISM manufacturing and retail sales coming in below par.

Inflation data is starting to behave. Last week’s personal consumption expenditures price index (PCE), which is the Fed’s go-to measure, showed both headline and core inflation for April aligned with expectations and continuing their downward trend.

Headline PCE inflation was at 2.7% year-over-year, while core inflation came in at 2.8%, inching closer to the Fed’s targets of 2.4% for headline inflation and 2.6% for core inflation.

My informed hunch is that the Fed will want to see a couple more cool inflation reports before making any moves, potentially setting the stage for a rate cut at the September 17-18 Federal Open Market Committee (FOMC) meeting.

All eyes are now glued to this Friday’s U.S. nonfarm-jobs report, the grand reveal for the labor market’s health and inflation signals. The May jobs report is expected to show about 185,000 new jobs, a slight improvement over April’s 175,000 but still shy of this year’s average of 245,000 and last year’s average of 250,000.

The unemployment rate is anticipated to hold steady at 3.9%, still a climb from last year’s 3.4%. Investors will also be scrutinizing the average hourly earnings figure, looking for signs of services inflation. Wage growth is expected to remain flat at 3.9% year-over-year, the lowest since June 2021.

A softening labor market and cooling wage gains support lower inflation across the board. Barring any nasty surprises in the forthcoming data, the bull case remains intact for the equity markets. Don’t let the gloomsters persuade you otherwise.

The major U.S. equity benchmarks closed sharply higher Wednesday as follows:

  • DJIA: +0.25%
  • S&P 500: +1.18%
  • NASDAQ: +1.96%
  • Russell 2000: +1.47%

The 30-year U.S. Treasury yield continued its descent, falling 0.96% to close at 4.44%. The CBOE Volatility Index (VIX), aka “fear gauge,” plunged by about 4% to hover at 12.6, a sign that investor stress is dissipating.

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John Persinos is the editorial director of Investing Daily.

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