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Wall Street Rallies on Disinflation Hopes, Setting Stage for Future Fed Policy


Benjamin Hughes

May 18, 2024 - 14:00 pm


Wall Street Witnessed a Surge as Markets React to Disinflation Hopes

In a twist of events synonymous to the idiom "bad news is good news," Wall Street concluded last week with a rally across all three major indexes. This unexpected upturn was primarily fueled by less robust retail sales alongside milder consumer price data for the month of April. Pundits view this as a glimpse of disinflation, an ostensibly auspicious signal for those anticipating a reduction in the Federal Reserve’s interest rates possibly by 2024.

Disinflation Sparks Optimism for Lower Interest Rates

Amid the usual flurry of economic indicators, two more reports lent credence to the burgeoning belief that the Federal Reserve's ongoing battle with inflation is yielding fruit. April saw a downturn in single-family home building and permits, a notable shift considering a rekindled vigor in March. Meanwhile, industrial production didn't meet expectations, further bolstering the disinflation narrative.

The Resilience of the Real Estate Market

Despite the less optimistic metrics, not every sign was foreboding. April's producer price index, which scales wholesale prices, ascended by 0.5% – an outcome that overshadowed the 0.3% forecast by Dow Jones. Nonetheless, the aggregation of less positive news proved beneficial for the equity markets. For the first time, the Standard & Poor’s 500 index proudly stood above 5,300 points midweek. Propelling beyond expectations, the Dow Jones Industrial continued its stride by crossing the 40,000 mark, eventually concluding the week above this milestone.

S & P 500’s Record Performance Invigorates Investors

The trajectories of these prominent indexes speak volumes about the market sentiment. The Dow culminated with an uptick of 1.2%, marking its fifth consecutive weekly gain, while the S & P 500 embraced a 1.5% rise. The Nasdaq Composite, too, found momentum, climbing by 2.1%. Technology stocks played a pivotal role within the broader S & P 500 arena, succeeded by real estate and healthcare sectors, contributing substantially to the upside. However, industrials and consumer discretionary sectors did not share the same fate, being the only two sectors to register a decline.

Earnings Windfall: Surprises Abound Amid the Quarter's End

As we edge closer to the closure of the second-quarter earnings season, data assimilated by FactSet reveals that approximately 93% of S & P 500 companies have now declared their financial results. The data, being largely positive, shows an overwhelming 78% of these companies topped earnings projections, with 60% surpassing sales expectations. The incoming week, though anticipated to witness diminished economic data, remains significant with earnings reports from three influential portfolio companies including a coveted "own, don't trade" stock.

Housing Market: The Federal Reserve’s Thorn

With less dense economic data expected in the forthcoming week, the spotlight turns to two housing reports. On Wednesday and Thursday, reports pertaining to existing home sales and new home sales for April will be diligently analyzed. The housing market’s tenacity, despite the burden of escalating interest rates, has been a consistent complication for the Fed. Given that shelter represents a considerable one-third of the Consumer Price Index (CPI) and even more upon excluding food and energy prices, it undoubtedly exerts substantial pressure on consumer expenses, thus complicating Fed policy.

A Look Ahead to Upcoming Earnings

The impending week holds the potential for market-moving disclosures from Palo Alto Networks, which aims to recuperate from January's uninspiring figures as it embarks on a strategy renewal to expedite "platformization," the bundling of services and products aimed at drawing more clients into their cybersecurity ecosystem. This strategy might weigh on short-term finances but is hoped to fuel long-term growth. Furthermore, off-price retailer TJX Companies could gain from their value offerings, as consumers seek respite from persistent inflation by hunting for better bargains. The management's discourse on store traffic and purchasing patterns will be crucial. Also, Nvidia, known for its AI prowess, is predicted to surpass expectations yet again, thanks to its Ash Blackwell chip set to debut later in the year. The company's observations on chip lead times will be pivotal, given the persistent mismatch between demand and supply.

Earnings Calendar: A Week of Anticipation

In the realm of corporate earnings, several companies are on the roster to disclose their performance. Investors will be keenly awaiting insights from companies across a wide range of industries. On Monday, before the opening bell, we expect reports from companies like Li Auto,, and Global-e Online, whereas after the market closes, all eyes will be on Palo Alto Networks and others. The subsequent day continues with more companies, including Lowe's and Macy’s, divulging their financial health before market open, whereas the likes of Urban Outfitters will share after market close. Nvidia, picked to be a focal point, will release its earnings after Wednesday's bell, alongside Snowflake and other tech entities. Thursday's and Friday’s lineup will similarly herald a mix of corporate earnings that are poised to influence market directions.

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Federal Reserve Policy and the Economic Landscape

The investment strategies and economic perspectives are significantly influenced by the Federal Reserve's policies, which depend heavily on various data points, including inflation indicators and housing market conditions. As the market digests the information garnered from these reports, investors continuously recalibrate their forecasts for the Fed's interest rate decisions.

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The ongoing economic narrative presents a complex picture fraught with mixed signals. While disinflationary trends could signal the end of rate hikes and potentially cue rate cuts, entrenched inflation in the housing market and other sectors present a conundrum for rate-setters. The weeks ahead will likely yield significant clues as to whether these disinflationary trends have the tenacity to shape Federal Reserve policy.

With the markets showing sensitivity to every nuanced shift in economic reports, the journey through the remainder of 2023 remains replete with uncertainty. As is often the case, the savvy investor's watchword is vigilance—carefully parsing each economic release and earnings report for signs of where the markets might be headed next.

Given the complexities surrounding Federal Reserve policy-making in an unpredictable economic environment, the Investing Club remains a crucial resource for investors seeking to navigate these turbulent waters.

The interplay between economic indicators and the stock market's performance serves as a continuous narrative that captivates and dictates investor sentiment. As Wall Street opens a new chapter with its recent records and as companies line up to report their financial standings, participants in the financial markets brace themselves for what promises to be an intriguing week of figures and forecasts that could either reinforce the current market optimism or herald a shift in the prevailing trends.

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