Despite our cautious predictions, the market did well last week. We told you to look out for volatility when Fed Chairman Jerome Powell gave his speeches on Monday and Wednesday, and those were the only days that deviated from an otherwise positive week.
Because Powell turned jittery investors’ attention back to inflation, which is still very much a pressing issue for the market, we have to make sure we’re taking inflation into account this week as well — especially when we get two big inflation-related announcements in a row this Thursday and Friday.
The S&P 500 rallied 1.79% last week while long-term interest rates moved 16% higher. That was the biggest one-week jump in long-term rates since March of 2020. This matters because inflation pushes interest rates higher faster, and if rates are rising faster than growth, then they drag on stock returns.
First, the Personal Consumption Expenditures (PCE) report is out on Thursday. This is the Fed’s favorite measure of inflation and it has a tendency to surprise traders. The last time the PCE report was above expectations was the end of Dec. 2021. When the market reopened after the Christmas holiday, the S&P 500 dropped more than 10%.
Following the PCE numbers, the Bureau of Labor Statistics will release the new unemployment rate and jobs numbers for the last month on Friday, April 1. We don’t expect any bad news about jobs, but the wages data that accompanies the report might be tough for traders to deal with if it shows wages rising too fast.
Don’t get us wrong… rising wages themselves aren’t a bad thing. But if companies are paying more, then costs are higher and earnings are lower. Assuming inflation’s growth rate slows down a bit over the next month or two, the rising wages should increase consumption, and profits will catch up. But in our experience, the initial reaction to rising wages by traders is negative.
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Like last week, we have a somewhat cautious outlook for the next few days. However, as you know, we think it’d behoove traders to use the recent retracement in the major stock indexes to buy while stocks are at a low.
The main reason stocks did so well last week was the big gains in the energy sector as prices rose again. However, we think investors should only look at energy stocks for very short-term positions, because prices could drop back down quick.
For now, retail and tech still look good. We like NVIDIA (NASDAQ:NVDA) and Microsoft (NASDAQ:MSFT) as two companies positioned to take advantage of increased business spending and hiring. If rates continue to climb this week, the entire tech sector could drop down a little, but overall valuations are low enough to justify the risk.
We are still ahead of earnings season, but the early reports have been good. However, until the big reports start in mid-April, all eyes will be focused on economic data — especially inflation. As we mentioned earlier, we will see two big inflation reports on Thursday and Friday, which will likely kick off some volatility.
However, for now, we recommend any dips as buying opportunities while stocks are still near their lows.
Make sure you join us tonight at 7:00 p.m. at our Learning Markets livestream, where we’ll discuss what to buy as inflation worsens. It’s 100% free to attend, and we hope to see you there.
