Stocks tried to rally back Thursday on the good news from the uber-impressive NVDA earnings report propelling shares to even greater heights. Unfortunately, the strength of NVDA is really only of benefit to a very small group of stocks associated with AI…and not really representative of the full economy.
That is why 15 minutes after the open a sell-off ensued as the PMI Flash report was MUCH HOTTER than expected. Meaning that inflationary pressures persist pushing up bond rates…and pushing the market considerably lower.
As is becoming far too common, traders have been too optimistic about the odds of rate cuts on the way in July or September. That was the resounding message from the 5/1 Fed meeting minutes released Wednesday afternoon leading to a spike in bond rates and a sell-off for stocks with the S&P 500 (SPY) backtracking towards 5,300.
Basically, inflation is too persistent leading them to keep higher rates for longer (which they keep telling us, but people keep not listening). And that it may even take raising rates a notch more to be the final death blow to high inflation to get back on track to 2% target.
So even though NVDA wowed the crowd on Thursday morning, it didn’t take long for reality to set in with the broader market sinking into the red. The PMI Flash report at 9:45 am ET came in well above expectations at 54.4 when only 51.1 was expected.
Bond investors got the memo immediately as the 10-year treasury spiked right as this news came out. The timeline of 9:45 am ET coincides with when the Russell and Dow dropped into negative territory and descended further and further into the finish line.
The July 31st Fed meeting has gone from 47% probability of a cut down to 13%. Whereas the September 18th meeting still stands at just over 50% probability of a rate cut when that was a 73% certainty not that long ago.
In talking with some investing friends, they discussed how most investors are not truly prepared for the “higher for longer” theme to play out. Investors are still a touch too optimistic about the timing of rate cuts and perhaps should reconsider their investment strategy.
In the long run, we are in a bull market. But with 50% gains in hand from the bottom just 19 months ago, the easy money has already been made. Now is a time to take profits off overly engorged positions and reallocate to those that offer more value and upside potential.
The further out that the first rate cut gets pushed, the more likely we are to endure a 3-5% pullback in the overall market. Not too scary when you consider the gains already in hand.
SPY shares were trading at $527.81 per share on Friday morning, up $1.85 (+0.35%). Year-to-date, SPY has gained 11.39%, versus a % rise in the benchmark S&P 500 index during the same period.
Steve Reitmeister, also known as “Reity,” is the CEO of StockNews.com and shares his 40 years of investment experience in the Reitmeister Total Return portfolio.
