by Bryan Perry

May 21, 2024

As some market bears are shouting, “Dow 40K and go away,” (a play on “Sell in May and Go Away”), it should be noted that the current bull run for stocks is anything but a Magnificent Seven-led rally. Far from it. There are three primary catalysts for why the market is trading at its current levels and why it has the potential for further gains, stretching right into the second-quarter reporting season in mid-summer.

First, core inflation finally showed some signs of a cooling trend. The change in month-over-month CPI was a genuine relief following two months of hotter-than-forecast numbers. For April, core CPI was up 3.6%, down from 3.8% in March, and also in-line with market expectations. The disinflation in April is still only a small step toward the Fed’s 2% target, which will leave the Fed firmly entrenched in its wait-and-see mode, as voiced by several Fed officials last week, and yet the CPI added to bullish sentiment.

US-Core-Inflation-Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Second, bond yields are falling, despite the Fed holding its Fed Funds rate unchanged at 5.25%-5.50%. The bond mavens are sensing that, regardless of the higher-for-longer Fed-speak being touted on the speaking circuit, there are early signs of consumers showing more discretion based on the soft April retail sales data (0.0% versus a 0.4% predicted estimate) and a very low reading for the University of Michigan Consumer Sentiment Survey for May (67.4 versus 76.5 estimate). Per the Briefing.com analysis, “the key takeaway is that the downturn in sentiment was driven by decreases across age, income, and education groups, and revolved around worries pertaining to inflation, unemployment, and interest rates.”

The yield on the 2-year Treasury has fallen from 5.04%, at the end of April, to 4.82% as of Friday, May 17, and the 10-year Treasury yield has slid from 4.74% to 4.42% over the same period. The direction of the bond market almost always leads the direction of monetary policy. Even as shelter, food and energy prices remain elevated, the previous Non-Farm Payrolls report for April (175K versus 250K consensus) set the current bond rally in motion that has been a bullish game changer for stocks.

Consumer Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Thirdly, the market rally is showing improving breadth, as evidenced by the consistently strong advance/decline line, where the most recent trading sessions reveal 3-to-1 and 4-to-1 gainers over losers. This is quite possibly the most vital component of the current rally, as it demonstrates that the market is enjoying widespread sector participation and not just the kind of narrow leadership that represented the first half of 2023, when the Magnificent Seven led a market where most sectors lagged. This recent development of well-defined market breadth is a strong technical indication that the bull trend will remain in place over the intermediate term, say into the Q2 reporting season running through the month of July.

For the present, investor confidence has rebounded, with Bank of America’s global fund manager survey showing bullish sentiment among money managers now at its highest point in more than two-and-half years, as 82% of investors expect the U.S. Federal Reserve to start cutting rates in the second half of 2024 and 78% expecting two, three or even more rate cuts within the next 12 months.

SP500 Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In addition, the Atlanta Fed GDPNow estimate for second-quarter GDP growth has come down from 4.2% a week ago, to 3.6% as of May 16, which probably reflects some implied slowing of future consumer spending, and coming off what has been several quarters of robust consumer spending that contributed to persistently higher inflation thanks to a strong labor market driving demand. That perception is changing and with it the notion of a soft-landing taking hold of market sentiment, which has both professional and retail investors feeling better about their prospects for further stock market gains.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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