Hope you are all doing well. Happy Memorial Day! The market finally gave us something to celebrate this weekend. The S&P 500 snapped a string of seven negative weeks in a row. The index surged nearly 7% along with the other major indexes to post the best weekly result since November 2020. The sharp turnaround came a week after the S&P 500 narrowly avoided entering a bear market, defined as a decline of 20% or more from a recent high. Ray Liotta passed away this week. I have broken down this week’s market news using quotes from his most famous movie, Goodfellas.
Short sellers and bear market pundits have had a lot to root for the last two months. We got a break from losing this week but one week of gains does not mean that the coast is clear. In the short-term (next few months) the investment backdrop is far from ideal. The Fed will continue tightening at a fast pace, and the economy is decelerating. The markets will remain volatile. However, several economic indicators continue to hold up well, and corporate earnings are still expected to grow at a decent pace and grew at 9% in the first quarter, consumer spending remains strong, the labor market is stellar, and the markets bounced before they could close in bear market territory. Expect the markets to rebound in the second half of this year and next.
The Fed like Billy Batts didn’t initially realize the danger they put themselves in, labeling inflation as transitory and not reacting sooner. Wednesday’s release of minutes from the latest U.S. Federal Reserve meeting showed that policymakers could need additional half-point rate hikes to deliberately slow economic growth to fight inflation. The U.S. Federal Reserve’s preferred gauge for tracking consumer prices shows that inflation moderated somewhat in April. That is a positive sign that the rate hikes are working. The four-decade-high inflation keeps the pressure on the Fed to act. The annual rate of price increases appears to have crested. However, the Fed is still targeting a lower inflation, so expect the Fed to continue raising interest rates by a half a percentage point at both of their next two meetings.
The markets like DeVito had an unhinged response to negative economic news. The markets rallied significantly on Thursday despite a new downward revision of first quarter GDP. GDP was revised down to -1.5% in the first quarter. A deeper dive into the numbers reveals that maybe the number was not as bad as it seemed. Despite rising prices, the revision showed consumers are still spending. Personal consumption expenditures were revised higher from 2.7% to 3.1%. Personal consumption accounts for more than two thirds of economic activity. Consumption increased in April at its fastest pace in three months, supported by solid job growth and accumulated savings.
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