Downshift in Inflation Pressures Combines with Strong Earnings to Breed Optimism

Last week was another week of records for the major equity indices, with the S&P500 breaking to new highs and the Dow Jones Industrial Average (does anyone follow the Dow anymore?) breaching 40,000, bringing back memories of the David Elias classic book “Dow 40,000”, where he speculated that the index would punch through that number by 2016. New equity highs were tied to two important economic releases, each of which broke in Powell’s direction, pushing interest rates lower, and inducing the upward action Pavlovian Response of the equity markets to lower rates. The initial driver of last week’s equity rally was a cooler than expected CPI release. It wasn’t so much that inflation was put on ice as it was a relief that inflationary momentum of the first three months of the year seemed to subside. The other big factor was Retail Sales, which took nosedive, dovetailing with the recently released blog from San Francisco Fed, which calculated that excess savings from the pandemic is officially exhausted, and data released from the New York Fed that consumer debt and delinquencies indicated further consumer strain. The combination of the perception of softer inflation with consumption headwinds fed a narrative that the economy would slow enough to support rate cuts sooner rather than later. Although, the recent run higher in equity prices supports our bullish call on equities, we caution not to get overly enthusiastic about a week or two of data. We believe the path for inflation, rates and consequently the equity markets, will be contingent on three forces – Labor Markets, Housing and Energy – each of which have been showing signs of weakness in the last month. If weakness persists in these areas, the Fed will likely embark on a mild rate cutting cycle this year, or perhaps a more aggressive campaign, if weakness shows signs of snowballing. Although rate cuts could ultimately bring positive outcomes for equities, the path higher for equities could be riddled with significant volatility if growth expectations erode along the way. 

•Earnings Dashboard: Faceoff between Fab 5 vs. Healthcare

•Housing holds the keys – higher active listings and falling sales may be signaling a shift in trend

•A downshift in Retail Sales links up with San Francisco Fed’s end of pandemic savings call and NY Fed delinquencies data

•Some of the other major stories of the week that have long-term implications: Emerging Markets and AI

•Focus Point Sector Rotation Update: Upward trends rocking and rolling everywhere but Energy and Consumer Discretionary