Market Update – May 20th, 2024

Author: Joe Maas, Synergy Asset Management

Monday, May 20th, 2024

Financial Markets

Stocks rose last week on a soft CPI inflation print, notching new all-time highs on all three major equity indexes. As of close on Friday, May 17th, the S&P 500 gained +1.54% for the week, while the Nasdaq Composite gained +2.11%. The Dow Jones Industrial Average also surpassed the 40,000 mark for the first time in history, ending the week up +1.24%. Finally, the Barclays Aggregate Bond Index rose +0.55%.

Market News

April CPI Fuels the Bulls. April’s Consumer Price Index report came in below expectations, driving the S&P 500 to record highs on Wednesday as investors gained confidence in the fight against inflation. Annual CPI inflation clocked in at 3.4%, with core CPI slightly higher at 3.6%. On a monthly basis, both headline and core CPI increased by +0.3%.

Breaking down the numbers, food prices rose by 2.2% year-over-year, with grocery prices up by 1.1% and food away from home increasing by 4.1%. Energy prices saw a 2.6% rise, with gasoline prices up by 1.2% compared to April 2023. The cost of used vehicles fell by -6.9% from a year ago. Shelter costs continued to post heavy inflation, up 5.5% year-over-year, while transportation expenses surged by 11.2%, driven largely by a more than 20% increase in auto insurance costs.

Most importantly, this month’s disinflationary data has strengthened expectations that the Federal Reserve will likely implement its first interest rate cut by or during the September meeting. This softer inflation report has eased concerns about persistent inflation, paving the way for a potential loosening of monetary policy by the Federal Reserve later this year.

Source: BLS

April PPI. Contrary to the CPI, the Producer Price Index for April came in hotter than expected, raising concerns about future consumer inflation. Headline PPI rose by +0.5% in April, surpassing estimates of a +0.3% increase. Similarly, core PPI, which excludes food and energy, increased by +0.4%, compared to the anticipated +0.2%. On an annual basis, headline producer prices rose by 3.1%, while core producer prices saw a 2.2% increase, both marking an uptick from March’s figures.

Within producer prices, food costs fell by -0.7% in April, while energy costs rose by +2.0%, resulting in a total goods price increase of 0.4%. For services within the PPI, trade costs climbed by +0.8%, while transportation and warehousing costs decreased by -0.6%, leading to an overall services inflation rate of 0.6% month-over-month in April.

This rise in producer prices, particularly with headline producer inflation back above 3% for the first time since April 2023, does not bode well for consumer inflation data ahead. The PPI is often seen as a leading indicator of future consumer inflation, as producers often must pass on their higher production costs through prices to end consumers. This PPI report underscores the complexity of the current inflation landscape, suggesting that while consumer inflation may be cooling, underlying pressures at the producer level could challenge this trend in the near future.

Source: BLS

Retail Sales. April’s retail sales data showed a much softer month of spending than anticipated, with sales remaining flat month-over-month compared to the expected +0.4% gain. Excluding auto sales, retail sales edged up by +0.2% for the month. On an annual basis, retail sales increased by 3.0%, a slower pace than the rise in CPI inflation for April.

Online shopping and dining establishments continued to lead growth, with non-store retailers (online shopping) up 7.5% and food service and drinking places rising by 5.5% compared to April 2023. However, several categories experienced declines, with furniture store purchases down by -8.4% year-over-year, and sales at sporting goods, hobby, musical instrument, and bookstores falling by -4.7%.

Despite the weak retail sales figures, this data coincided with April’s CPI data this week, leading to bullish market sentiment on hopes that the US may actually be headed for a true soft landing and the Federal Reserve can begin to cut rates.

Leading Indicators. April saw the Conference Board’s Leading Economic Index dip by -0.6%, slightly worse than expected. Despite the worse than expected data, leading indicators did not signal a recession for the second month in a row, owing to improved six-month growth rates in the LEI. Over the past six months, the LEI contracted by 1.9%, showing a slower decline compared to previous periods. While it doesn’t foresee an immediate recession, it indicates economic softness ahead.

Factors like weakened consumer outlook, lower new orders, negative yield spread, and reduced building permits contributed to April’s slip. Moreover, stock prices were a negative factor for April’s decline in the LEI for the first time since October. Looking forward, the Conference Board believes the US economy faces a mix of challenges, with elevated inflation, high interest rates, rising household debt, and depleted pandemic savings all expected to continue weighing on economic growth throughout 2024.

Summary

US stocks surged to new all-time highs last week on a softer CPI inflation report. April’s CPI report, showing an annual inflation rate of 3.4% and a core rate of 3.6%, boosted market confidence, confirming a potential Federal Reserve rate cut by September. In contrast, April’s PPI came in hotter than expected, raising concerns about potential consumer inflation ahead. Retail sales for April were flat, missing expectations, also supporting the case for a rate cut by September. The Conference Board’s Leading Economic Index dipped by -0.6%, signaling economic softness ahead but a lower likelihood of a recession in recent months.

We appreciate your continued trust.

Thank you,

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA
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