The stock market had a stellar performance, propelling the three major indices to fresh record highs. The S&P 500, in particular, closed above the 5,200 mark for the first time, with an impressive 2.3% gain. The Nasdaq Composite jumped 2.9%, while the Dow Jones Industrial Average gained 2.0%.
These gains were largely fueled by the announcement of the Federal Open Market Committee’s (FOMC) policy. As expected, the committee unanimously voted to leave the Fed funds rate target range unchanged at 5.25-5.50%.
However, the real catalyst for increased buying activity was the closely-watched dot plot, included in the updated Summary of Economic Projections (SEP), which showed that the Fed still anticipates three rate cuts this year despite recent inflation readings coming in hotter than expected.
During his press conference, Fed Chair Jerome Powell reiterated previous comments, indicating that the Fed needs more evidence that inflation is moving toward the 2% target before cutting rates. He also mentioned that it would be appropriate to slow the pace of asset runoff fairly soon.
Rate cut expectations moved up this week, contributing to the positive bias in the stock market. According to the CME FedWatch Tool, the implied likelihood of a June cut rose to 75.4% from 58.8% last week.
The price action in Treasuries also played a role in the stock market’s positive sentiment. The 2-yr note yield declined 12 basis points to 4.60%, and the 10-yr note yield fell eight basis points to 4.22%.
Mega-cap stocks had an outsized impact on index gains. The Vanguard Mega Cap Growth ETF (MGK) rose 2.5% this week, while the equal-weighted S&P 500 rose 1.4%.
U.S. Market Highlights
Here are some notable events that shaped the U.S. markets this week:
- In a landmark antitrust case, the Department of Justice (DOJ) sued Apple over its alleged iPhone monopoly. The lawsuit claims that Apple’s ecosystem supports its monopoly, from the Apple Watch to Apple Pay. Following the news, Apple’s shares fell 4%.
- Congress passed a $1.2 trillion funding bill late Friday night to avert a government shutdown at the last possible moment. The legislation now goes to President Joe Biden, who has said he’ll sign it into law.
- Home sales spiked 9.5% in February to 4.38 million units, the largest monthly gain in over a year. Higher demand and low supply pushed the median price up 5.7% from the year before to $384,500.
- Intel was awarded up to $8.5 billion in federal grants under the CHIPs Act as the Biden administration ramps up efforts to bring semiconductor manufacturing to U.S. soil. Intel could also receive up to $11 billion in loans.
- Reddit shares popped 48% in their NYSE debut after selling shares at $34, the top of the expected range. The 19-year-old website that hosts millions of online forums now trades under the ticker “RDDT”.
- Shell announced plans to divest 1000 locations in a pivot to EV charging and will focus its efforts in China and Europe, where the EV market is more developed. Shell aims to increase its charging stations from 54,000 today to 200,000 by 2030.
- Apollo Global offered $11 billion for Paramount’s film and TV studio. The company is also reviewing an offer to merge Skydance with all of Paramount, which owns CBS, Nickelodeon, and several cable networks.
Global Market Highlights
The global markets also saw some significant developments:
- Japan raised interest rates for the first time in 17 years, with the Bank of Japan increasing its short-term rate to 0-0.1%, from -0.1%. They also abandoned its yield-curve control and ended most of its asset purchases.
- England, Australia, and China all held rates steady as central banks remained cautious about inflation. The Bank of England hinted at rate cuts ahead, while the Reserve Bank of Australia said more hikes could be coming.
- In a surprise move, Switzerland became the first major economy to cut interest rates. The Swiss National Bank lowered its main policy rate by 25 basis points to 1.5%, saying inflation will likely remain below 2% for the foreseeable future.
- China’s economic data beat expectations by a wide margin to start the year, with retail sales up 5.5%, ahead of the consensus forecast of 5.2%. Industrial production increased by 7%, compared with estimates of 5% growth.
- Foreign direct investment in China continues to fall as economic growth has plateaued. China attracted just 215.1 billion yuan ($29.88 billion) of FDI in the first two months of the year, down 19.9% from a year ago.
- Inflation in Canada unexpectedly cooled to 2.8%, coming in well below estimates of 3.1%. The soft inflation report increases the odds of rate cuts, which the market expects to start in June or July.
- Ireland’s Prime Minister Leo Varadkar unexpectedly resigned, noting that he believes a new leader would be in a better place to guide his party into the upcoming local and European elections.
Investor Takeaways
In my view, this week’s market action reflects growing confidence in a “Goldilocks” economic scenario – not too hot, not too cold. If the Fed can tame inflation without causing a recession, it would be the best outcome for stocks.
However, I would caution against getting too complacent. Risks remain, from geopolitical flare-ups to the potential for inflation to prove stickier than expected. As an investor, it’s important to stay diversified and not overreact to short-term swings.
If the Fed does cut rates, there is a huge risk this will ignite inflation. I will be watching it and using tools like Truflation to get an idea of what is happening real time.
Looking ahead, the market will be watching for signs that the Fed’s rate hike campaign is having the desired effect on inflation. Any evidence that price pressures are cooling could fuel hopes for rate cuts later this year, providing a further tailwind for stocks.
One interesting fact: since 1950, the S&P 500 has averaged an 8.4% annual return (not adjusting for inflation). Patience and consistency tend to pay off over the long run.
Of course, predicting the future is never easy. I strive to help my readers navigate the complexities of the ever-changing market landscape. By staying focused on long-term goals and making informed, data-driven decisions, investors can position themselves for success in any environment.
Commodities & Crypto
Energy
The mood on the oil markets has changed this week, with traders realizing that the market is not as well-supplied as previously thought. The International Energy Agency has revised upwards its demand growth forecasts while adjusting downwards the dynamics of world supply due to OPEC+ policy. Against this backdrop, geopolitical friction remains high in Ukraine and the Middle East. Weekly US inventories posted a surprise decline this week, the first since late January. Brent crude is trading higher at around $85, while WTI is trading at around $80.80.
Metals
Copper continues to perform well in London, approaching the $9,000 per metric ton mark, as China plans to ease up on its copper production. Aluminum stabilized at $2,200, and zinc advanced to $2,520. In gold, the precious metal took a breather after two strong weeks, trading at $2,160, as bond yields are rising again.
Crypto
Bitcoin (BTC) is down 1.40% this week, around the $68,000 mark, after hitting a new all-time high of $73,830 on Thursday. Bitcoin Spot ETFs are still fueling the rise, with a record day of net inflows into these exchange products on Wednesday. No less than $1.05 billion flowed into ETFs in a single day. Meanwhile, ether (ETH) is down 4% this week and has yet to regain its all-time high of $4,800, reached in November 2021.
Calendar & Movers
Economic Reports
In the week ahead, a host of Federal Reserve speakers will return from a blackout period following the latest FOMC meeting. With the Fed signaling confidence in three anticipated interest rate cuts this year, investors will be watching the upcoming speeches for commentary that will reinforce that messaging.
Fed board governors will be giving various talks, capped off at the end of the week by Fed chair Jerome Powell participating in a moderated discussion at a San Francisco Fed conference. With the Fed’s latest messaging, market participants have increased their expectations of a 25 basis point rate cut at the central bank’s June meeting.
The economic calendar will feature the Fed’s preferred inflation gauge – the personal consumption expenditures price index.
There will also be data on consumer confidence and durable goods orders.
Earnings
Turning to corporate earnings, investors will receive quarterly reports from Walgreens Boots Alliance (WBA) and the world’s largest cruise line operator Carnival (CCL).
The week will also feature a potentially important investor day for parcel delivery giant UPS (UPS).
That’s all for this week, folks! As the legendary investor Peter Lynch once said, “Know what you own, and know why you own it.” Keep that in mind as you navigate the ever-changing financial landscape. Until next time, happy investing!
