Weekly Market Update: May 6, 2024

The U.S. gross domestic product (GDP) expanded at an estimated annualized rate of 1.6% in the first quarter, according to the latest government report. That figure fell short of the consensus forecast of 2.3% and was less than half the pace recorded in the final period of 2023. However, the shortfall was not as bad as it looked at first blush, as output was hurt by the drawdown of inventories over the first three months of 2024. The tally also included a still-healthy 2.5% increase in personal consumption.

An increase in price growth during the initial quarter was problematic, though. In fact, the Personal Consumption Expenditures (PCE) Price Index, the assessment of inflation most closely watched by the Federal Reserve, increased 3.4%. That figure came in well above forecasts and was up significantly from the 1.6% gain registered in the December quarter. Clearly, inflation remains relatively high, and this likely reduces the probability of a near-term central bank pivot on the monetary policy front.

Treasury market yields are moving higher. There are a few reasons for the uptick, most notably the aforementioned strong inflation data. This will likely result in the Fed keeping interest rates high for longer. (The Federal Open Market Committee was scheduled to issue its May monetary policy decision shortly after we went to press. At that time, it was expected to hold the federal funds rate steady at 5.25% to 5.50%.) It also is worth noting that recent Treasury market auctions have not produced the desired demand, pushing yields on government-issued securities higher. At times, the rising yields have weighed on both U.S. equities and bonds.

Earnings season, for the most part, is again proving supportive for stocks. At the halfway point, more than 75% of the S&P 500 companies that had reported surpassed earnings forecasts. This puts the S&P 500 Index on pace for its third-straight quarter of profit growth, which was needed to justify its high price-to-earnings multiple heading into the reporting season.

Conclusion: With inflation remaining sticky, and the timing of a cut to the benchmark short-term interest rate being pushed farther into 2024, we believe maintaining a portfolio consisting mostly of high-quality stocks and cash-equivalent securities will prove wise. 

Source: ValueLine.com