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Resilient Economy Meets Stubborn Inflation: Can the Fed Thread the Needle?

Inflation is still an issue but the economy continues to grow!

After the dramatic downturn on Tuesday, the largest sell-off since March 2023, triggered by unexpectedly high Consumer Price Index (CPI) figures. A closer examination of the latest data reveals a substantial decrease in inflation rates over the last year amid widespread recession predictions. Despite a year filled with recession warnings from analysts, it didn’t happen and surprising it was dramatically different. While it remains a possibility, current evidence suggests growth in the US, indicating a robust economy with strong earnings, employment, and increasing consumer confidence. This newfound confidence is leading to higher spending, although adjustments may be necessary as higher interest rates will continue to moderate the economy, and market trends are never linear.  A pause in enthusiasm was expected and needed.  The recent uptick in spending, driven by optimism, has contributed to the market’s upward trajectory, though a market correction is always a good rebalancing event in a last bull market.

The stock market saw a rebound on Wednesday, though it couldn’t fully recover from the previous day’s losses spurred by the higher-than-expected inflation report. The S&P 500 managed to surpass 5,000. This situation has left investors contemplating whether the Federal Reserve can curb inflation without hurting the resilient economy.   Inflation is down from a year ago, earnings have been strong and economic data for the most part is good.

The ongoing robust economic growth is contributing to persistent inflation, potentially leading to higher interest rates. However, this economic vigor is also bolstering earnings, with the stock market more responsive to growth and earnings forecasts than to interest rates and inflation concerns. This dynamic indicates a healthy economy and the possibility of a bullish market phase.

Investors are awaiting further insights into the U.S. economic landscape. Retail sales were weaker than expectations proving the economy is moderating.  Weekly jobless claims were relatively mild, demonstrating jobs are still resilient.  We are seeing job layoffs in the tech sector, but it hasn’t been seen in the aggregate number.  The economic data shows that the economy is able to absorb the higher rates, with stubborn inflation.

The current earnings season offers a mixed view of corporate strength. Cisco’s stock is declining following the announcement of layoffs and subdued future sales forecasts. Conversely, TripAdvisor’s stock rose by 6% after exceeding expectations for both revenue and profits.

Rebalancing is usually good for the market.  We are always focused on the long-term.  Investors should always be disciplined and patient.  Quality growth stocks should benefit as the market takes a pause and the stock market begins to broaden and rewards stocks that are fundamentally strong.  There is confidence that the economy, stock market and consumer are resilient and strong.  There will be pauses but is nothing but part of training for the marathon. Discipline and patience remind us that a pause and rest is good but following the herd could be painful.   

Key Points:

  • The stock market volatility was triggered by inflation concerns after higher-than-expected CPI figures. But the US economy shows signs of strength with robust earnings, employment, and consumer confidence.
  • Inflation has decreased dramatically year-over-year, but remains a concern.
  • Recent data indicates moderate economic growth with mixed signals like weaker retail sales triggered partly by high interest rates but stable job numbers.
  • Investors are advised to be disciplined, patient, and focus on quality growth stocks during market corrections.

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