Investors encountered a less hawkish Fed than expected as Jerome Powell ruled out any rate hikes.
Inflation data was in line with expectations, resulting in a year-on-year result of 3.4% and a better-than-expected 0.3% monthly Consumer Price Index.
"Meme stocks," such as GameStop and AMC, experienced surprising volatility, with stock prices rising triple digits and correcting double digits afterward
96% of S&P 500 companies have reported earnings, while 78% have reported actual earnings per share above estimates.
Macro Corner
The month of May began with the FOMC meeting and statements from Jerome Powell on interest rates, inflation and the economy. Powell signaled that a rate hike at the next meeting is unlikely, with a 1.1% probability. Investors are betting on a single rate cut by the end of the year due to persistent inflation. Powell also mentioned a slower reduction of the Fed's balance sheet from $60 billion to $25 billion per month, which benefited the fixed income market.
On May 15, inflation data met expectations, with a year-over-year result of 3.4% and CPI of 0.3% month-over-month. Despite falling short of the Fed's 2% target, Powell expressed hope that inflation would decline on a monthly basis. Since this data, the S&P has risen more than 5%. However, rising freight costs and conflicts in the Middle East could hamper low inflation. Commodity prices, such as silver and gold, have risen. Silver demand continues to outstrip supply, with a projected 1.2 billion ounces this year. Gold has risen by 14% this year, driven by central banks increasing their reserves as an alternative to the dollar, which has also lifted the price of silver by 40%.
Technical Corner
In May, the S&P 500 recovered its April loss with a +4,96% return. However, in the longer term, prices are below the ascending channel since 2009, which could indicate a candlestick pattern of "hanging man"Typically a sign of inversion.
The market shows limited upside potential, with lack of momentum on the weekly chart and bearish MACD divergences. Consolidation is expected between 5,000 and 5,400 points, with a trading range of ~8%. Although there are no signs of collapse, market dynamics could change due to economic conditions, interest rates and global leverage. High single-digit annual returns could be a thing of the past.
S&P 500 (5'284.22) / Quarterly chart
S&P 500 (5'284.22) / Weekly Chart
Topic of the month: Strong markets and strong warnings
Between November 2023 and March 2024, the market recorded a 27% increase, driven by expectations of a soft economic landing and expected rate cuts from the Federal Reserve as mentioned. However, a consolidation phase began with a 5% decline due to economic data that exceeded expectations, reducing expected rate cuts.
Fed Chairman Jerome Powell denied rate hikes, but worrisome signs persist, even though the labor market shows signs of weakening, the housing market, one of the most important for the U.S. economy, faces challenges with rising prices and mortgage rates at high levels.
The conflicting data and elevated valuations mentioned above bring to the table the possibility of a market correction. Although there are no immediate signs of a collapse, inflation and rising interest rates and their effects pose such risks.
Investors should be wary of significant losses in the event of a market correction and be prepared for possible recessions.
The strategy we have in our sights:
We believe that, in this environment, we should analyze which products in the portfolio are more sensitive to market volatility in order to design effective hedging strategies. Take profits and place loss limits (stop loss) will be fundamental tools for any investor who wants to hedge effectively.
If this topic has piqued your interest and you would like to learn more about how inflation is defining market changes, our team of brokers will be happy to assist you and provide you with the information and advice you need.
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