Weak Inflation Pushes S&P 500 to Record Highs

The large-cap stocks in the S&P 500 zoomed a new record high on Thursday after a soft report on producer price inflation raised hopes the Federal Reserve will be forced to delay the pace and timing of its interest rate hikes later this year — with no action expected until September at the earliest.

It’s looking increasingly like a “one-and-done” scenario, with a single rate hike after Labor Day before policymakers pause to gauge the reaction from financial markets and the economy.

Stocks cheered the news, since the bulls now have a strong Pavlovian response to any promise of more cheap money stimulus.

In the end, the Dow Jones Industrial Average gained 1.1%, the S&P 500 gained 1.1% to hit a new closing high of 2,121, the Nasdaq Composite gained 1.4%, and the Russell 2000 gained 1%.

051415-silver

Precious metals and Treasury bonds were both strong. The iShares Silver Trust (ETF) (NYSEARCA:SLV) gained 1.8% as it pushes to levels not seen since February. That boosted the ProShares Ultra Silver (ETF) (NYSEARCA:AGQ) recommended to Edge subscribers to a 3.6% gain, pushing its month-to-date total to nearly 16%. The 10-year yield inched down to 2.24%.

Oil prices came in a little, with West Texas Intermediate falling 1.2% to close at $59.79 a barrel. That weighed on energy stocks, which limited their gain to just 0.1%. Retail stocks were also soft, down 0.1%, as investors continue to respond to Wednesday’s retail sales miss and the flow of soft sales results from companies like J C Penney Company Inc (NYSE:JCP) and Target Corporation (NYSE:TGT), which fell 7.7% and 3.2%, respectively.

Technology stocks were the highlights, rising 1.7% with software leading the way at the industry level. Adobe Systems Incorporated (NASDAQ:ADBE) gained 3.1% while Akamai Technologies, Inc. (NASDAQ:AKAM) rose 2.9%. Apple Inc. (NASDAQ:AAPL) added 2.3% after UBS raised its estimates and told clients its analysis suggests the company will move 51.1 million iPhones in the June quarter vs. the 45 million consensus estimate.

Avon Products, Inc. (NYSE:AVP) gained 6% after trading higher earlier in the session. This was spurred by a SEC filing from PTG Capital offered to acquire the company for $18.75 a share — a 180%-plus premium from Wednesday’s closing price — that now appears to have been a hoax.

Technically, stocks have inched to the upper end of a tight trading range going back 50 trading days. According to Bespoke Investment Group, the Dow’s 50-day high-low range, on a percentage basis, totals just 3.3%. That’s the lowest since the bull market began on March 9, 2009. The last time the Dow traded in such a narrow range was in September 2005, nearly 10 years ago.

Market history suggest the trading doldrums could last through the summer months; potentially putting traders and investors into a slumber that won’t end until the Fed potentially raises rates in September for the first time since 2006.

051415-producer-price-index

This delayed rate hike timing (expectations earlier this year were for a possible move in June) was bolstered by the ongoing decline in producer price inflation as shown in the chart above. In April, prices fell 0.4% on a monthly basis (vs. the 0.2% rise analysts expected). On an annual basis, prices fell 1.3%.

Given the strong bounce-back in energy prices over the last few weeks, with crude oil rising from a low of $47.05 to close April near $60, most assumed an inflation rebound would follow. The data suggests otherwise. That’ll bolster the doves at the Fed when policymakers next meet on June 16 and 17.

S&P 500 bullish

With stocks still looking shaky, amid uneven breadth, I’m concentrating on precious metals and the related mining stocks as a Fed rate hike push-back will only give inflation more time to surge ongoing gains in the market push wages higher and unleash consumer spending in the second half of the year.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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