Inflation trap? Stock market’s near-record run faces the most crucial CPI reading of 2024.

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Is the stock market about to fall into an inflation trap? This week’s Consumer Price Index (CPI) reading could be the most important of the year for U.S. stocks as inflation continues to rise. The Federal Reserve’s goal of achieving a 2% annual inflation rate has been disrupted in recent months, with energy and housing costs pushing the CPI for March up to a yearly rate of 3.5%. Market experts suggest that every data release is potentially a market-moving event, and with the Fed indicating that their next move may be an interest rate cut, investors are eagerly awaiting the next inflation print to determine the future direction of the market. Consumer sentiment regarding inflation is also on the rise, with the University of Michigan index showing a one-year inflation expectation of 3.5%. This could potentially give companies more leeway to increase prices. As investors try to interpret the signs, the stock market’s near-record run is facing a crucial test.
According to Mark Hackett, Nationwide’s chief of investment research, executives at major food and beverage companies have been acknowledging the increasing stress on consumers. McDonald’s, Starbucks, and Mondelez have all noted that consumers at all income levels are seeking value, becoming more discerning about where they spend their money, and becoming more price-sensitive. As of Friday, most companies in the S&P 500 index have reported first-quarter results, showing a 5.4% blended yearly earnings growth rate, the highest since the second quarter of 2022, according to John Butters, senior earnings analyst at FactSet Research Systems. This week, Home Depot Inc. will report on Tuesday, followed by the CPI for April and retail sales on Wednesday, and Walmart Inc. on Thursday. Anthony Saglimbene, chief market strategist at Ameriprise Financial, believes that as long as consumers are working, they will have the confidence to spend. However, foot traffic data from Home Depot and Walmart indicates a decline in visits for Home Depot and an increase for Walmart. Saglimbene also notes that the Fed is looking for both the economy and consumer spending on services to cool down. If inflation remains above target for a while, there are still strategies to protect portfolios while the Fed works to lower it and engineer a soft landing for the economy.
This year has seen divergence among the “Magnificent seven” mega-cap technology stocks. Nvidia Corp. has emerged as the leader with an impressive gain of over 81% in 2024, while Tesla Inc. has experienced a decline of more than 32% and Apple Inc.’s stock is down nearly 5%, according to FactSet.

Given the vulnerability of equities and bonds to inflation data, Bartolini suggests a balanced portfolio approach. He recommends including U.S. Treasury inflation-protected securities (TIPS) to counteract the potential impact of rising costs of living.

In addition, Bartolini highlights the potential of home builder stocks, citing a shortage of new home supply over the past 15 years. His firm’s SPDR S&P Homebuilders ETF has seen a 50% increase in value compared to a year ago, according to FactSet.

Other investment recommendations include short-dated credit, gold natural resource-focused stocks, and bank loans, which have attracted $4 billion in investments this year.

Saglimbene at Ameriprise notes that utilities, industrials, and certain cyclical value areas have outperformed. However, for stocks to reach new record levels and surpass previous highs, a cooling of inflation is likely necessary in the coming week.

According to Dow Jones Market Data, the Dow Jones Industrial Average advanced 2.2% for the week, coming within 0.7% of its late March record close. Similarly, the Nasdaq Composite Index gained 1.1% for the week, just 0.6% away from its mid-April record finish.