Things you need to know.
– CPI was softer, FOMC revises DOT Plot
– S&P and Nasdaq make NEW highs (again)
– The others not so much.
– Bonds rallied, Energy and Gold holding steady.
– PPI due out at 8:30 – will it support or challenge JJ?
– Try the Summer Watermelon/Tomato/Feta Salad
S&P pierces 5400! Nasdaq hits 17,608! – both records!
It’s the morning after and they are still celebrating….CPI came in ‘softer than expected’ – which is bullish, (as I noted yesterday – it was the drop in energy during the month that offset sticky higher prices in housing, food, insurance, utilities, etc.) and then JJ came out and announced that the members of the FOMC see one rate cut happening in 2024 (vs. the expected three that were penciled in after the March meeting) but he did leave the door open to another cut IF the data proves to be moving towards the 2% target – while also assuring investors that rate HIKES are not on the table…….saying that the FED has made considerable progress over the last two years and that yesterday’s report was another step in the right direction – while reminding journalists and investors, that he didn’t want to be too motivated (it would be premature) by any one single data point.
In order to cut rates, he will need to see more good data…. So, in the end – it was an ‘I am still on the fence’ kind of speech. He tried very hard to not sound too dovish nor too hawkish as he towed the line.
The much-anticipated Dot Plot revealed that of the 19 members of the FED – 4 favor NO CUTS, 7 projected 1 cut while the other 8 continue to push for 2 cuts in 2024. For 2025 – the committee is now suggesting 4 – 25 bps cuts or 1 full % point – which would take rates to 4% if it all plays out the way they laid it out.
Now when you look at the ‘Super Core CPI’ – which eliminates food, energy, and HOUSING – then the number was even weaker…well of course it was! Here we go again…. if the equation – for instance is 2+3+4+6+7+8 = 30, but then you take out food (4), energy (8) and housing (6) – then you end up with 2+3+7 = 12! How could the Super Core be higher if you removed sticky pieces of the equation? I mean that 1st grade math – But no matter – it is what it is and investors latched on….and took stocks higher (or so you would think) …. for most of the day – with only the Dow giving up the early gains as the 4 pm bell rang.
The Dow lost 35 pts, the S&P gained 45 or 0.8%, the Nasdaq gained 265 pts or 1.5%, the Russell added 33 pts or 1.6%, the Transports added 107 pts or 0.7% while the Equal Weight S&P took back the 35 pts or 0.5% that it gave up on Tuesday.
Now what is really interesting is if you look under the sheets –you would expect to have seen all the sectors racing ahead – but then you would be wrong….Of the 11 S&P broad sectors – 5 of them (45%) rose while the other 6 (55%) declined…..Which speaks to the ongoing underlying concerns that investors are still harboring…..and it also speaks to the broad rally that we have seen over the past month as the trader types tried to handicap what JJ was going to say, what the CPI would reveal and what today’s PPI will reveal….
Naturally in the lead was Tech the XLK + 2.2%, (blowout earnings from ORCL +13.25% clearly helping that sector along with more upside action from AAPL +3% and NVDA +3.5%) Consumer Discretionary – XLY + 1% and Industrials XLI – 1%, Real Estate – XLRE + 0.7% (think lower rates) and Basic Materials – XLB + 0.2% – after that it was weakness – Consumer Staples – XLP lost 1.1% which makes some sense – because who wants to own a boring sector that offers stability and ballast to a portfolio when the FED Chair says ‘rates are coming down’? (That’s a rhetorical question), Energy – XLE lost 1% – after we got some new news that US crude oil inventories rose by 4.1 million bpd last week– on top of the 2.1 million bpd the prior week – and that suggests waning demand, Utilities – XLU gave back 0.6%, Healthcare – XLV and Communications – XLC both gave up 0.2% with Financials – XLF losing 0.1%.
Now we also strength in Homebuilders – XHB rising by 3.5% (again think lower Fed Funds rates should send mortgage rates plunging and that should give a boost to the housing construction industry and all the parts that go with it – think appliances (WHR +6.2%), roofing (BECN +5.4%), AC/Heating (TT + 2.2%), flooring (FND + 5.2%), paint (SHW +1.1), furnishings (ETD +2.7%), cabinetry, wall board, bath fixtures, lighting fixtures and the list goes on – you get the point, yes?
Retail – XRT + 0.6%, Airlines – JETS + 1.7%, Semi’s – SMH + 3%, Cybersecurity – CIBR + 1%, Robotics – BOTZ + 2.2%, Aerospace & Defense – XAR + 0.6%, Expanded Tech – Software IGV +2.2%, the Growth Trade – SPYG + 1.5%. In contrast the Value trade – SPYV was down 0.1%, Oil and Gas Exploration – XOP down 1.2%, Coal stocks down 2%.
The contra trades – designed to benefit in a downturn – were mixed – the VIXY falling 2.2% (on declining fears of rising rates), the SH (S&P short) lost 0.8%, PSQ (Nasdaq short) -1.3% and the SPXS (triple levered S&P short) gave up 2.5%. But the DOG (Dow short) gained 0.1% (remember – the Dow fell yesterday, so it makes sense).
This morning brings us the May PPI report and while last month’s report was hotter than expected on all measures, this month’s report is expected to see top line PPI m/m fall back to +0.1%, but top line PPI y/y is expected to remain elevated at +2.5% (vs. 2.2%). And if you take out food and energy – we should see Core m/m of+0.3% (vs. +0.5% and Core y/y of +2.5% (vs. +2.4%). And so, this continues to offer a reason for JJ’s caution…. because remember – higher PPI numbers ultimately flow thru to the consumer over 4 or 5 weeks – UNLESS those producers choose to ‘eat’ higher costs – which I do not think they will do….
Now in the end – do not downplay the role that politics will play in the next couple of reports (ahead of the election) ….JoJo needs to see energy prices collapse and interest rates retreat – because as we saw yesterday – lower energy prices can offset higher ‘other’ prices -giving us the illusion that inflation is under control (because food, utilities, insurances, auto’s, housing are not lower) while lower interest rates will make money less expensive – playing right into Senator Lizzy Warren’s argument to the FED Chair blaming higher interest rates for climate change. Yes, I said it, she is blaming higher interest rates as the reason for ‘alternative energy’ projects getting sidelined – causing the planet to heat up…..It’s amazing really, I wonder what brain surgeon on staff wrote that letter that she signed, because I would like to think that was not her original thought.
I would just caution – while it appears that it was all good – there remain underlying concerns about the economy, the FED, the recent rally and the absence of any real pullback and consolidation. Look – while the S&P is up 13.5% ytd and the Nasdaq is up 17.3% ytd – we are seeing the Russell (Small and Mid-caps) struggling at + 1.5% ytd, Transports -4.8% ytd, Dow Industrials +2.7% ytd. And in the end – I remain steadfast that the tone changes as we move thru the summer and into the fall – so I am not changing my mind yet…I am still in the ‘no cut camp’ – remember – he did not say that the FED was going to cut rates 1 time this year, he said that some members of the committee are now seeing 1 rate cut – down from 3….So, for me, it remains fluid…..committing to a hard cut is different than suggesting there could be 1 cut – Capisce?
On the back of that excitement – we saw the bond market advance – the TLT + 0.7%, the TLH + 0.7% and the AGG gained +0.5%. Rising bond prices sent yields down (inverse relationship) – the 2 yr. is now yielding 4.75% (down from 5% only two weeks ago) while the 10 yr. is now yielding 4.30% (down from 4.77% only two weeks ago). And those lower yields only add fuel to the technology fire!
Oil traded in a near $2 range yesterday – a high of $79.25 and a low of $77.80 before settling in at $78.32. News of building crude inventories sending it on that wild ride. Word also that OPEC+ is unlikely to raise output anytime soon also weighed on the action…UNLESS there is a ramp-up in global demand – the Saudi’s are happy where they are…. That 2 million bpd that they considered restoring into the market will depend on market conditions – and right now – there is no need to restore it and that doesn’t mean there isn’t demand – there is, but remember – we have an oversupply issue already…it is not a demand issue (in my opinion) – forecasts by the industry are doing nothing but raising growth expectations, but the NON-OPEC members – think US, Canada, Brazil are pumping oil and raising supply that OPEC can’t control.
Gold also went on a wild ride – trading as high as $2358 and as low as $2323 before settling in at $2354. This as gold bugs dissected and digested the latest FED smoke signals…. Did he say they will cut, or did he say they might cut? Is it really just one or could it be none? Again – while it seemed all clear – maybe it isn’t so clear….and so Gold (like stocks) continues to thrash around as it tries to make sense of the data. This morning it is down $24 – at $2330 – leaving us solidly in the $2300/$2400 trading range.
US futures this morning are mixed…Dow futures down 120, S&P’s up 2, Nasdaq + 101 and the Russell is down 10. You should not be surprised at all…. Investors and traders have had a chance to digest the news and they remain mixed, besides the fact is that the dot plot was marginally hawkish, right? It went from maybe three cuts to maybe one cut…. In any case – today’s PPI report will shed more light on the economy and inflation….and while JJ welcomed the latest CPI report he made it clear that it was not enough warrant a hard rate cut just yet.
European markets are all lower…. Italy down 1.2%, Germany, Spain & France down 1%, while the Euro Stoxx is down 0.9%.
The S&P is now in another new century – closing up 45 pts to end the day at 5421…taking us up and thru seven century marks this year. Recall – on January 1st, the S&P was standing at 4769 as of last night it is at 5421…. a 700-point advance and to think – rates are at 5.25%! So much for the ‘restrictive argument’!
In any event – while it feels good for the market to rally – it doesn’t mean it’s time to go to sleep…it just means we need to be more vigilant. Add where you see opportunities and trim if it has become overweight, IF you think it has become overweight. Remember – consider your time frame, consider who you’re investing in and then talk to your advisor.
Call me to discuss a long-term game plan to help you create long term and generational wealth.
Take good care, 
kpolcari@slatestone.com
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions, which may not necessarily align with our firm’s standpoint.
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Kenny Polcari is the Chief Market Strategist for SlateStone Wealth. Neither Kenny nor the partners of SlateStone Wealth are compensated in any manner by the issuers of any securities mentioned in the publication.
Watermelon & Tomato Salad
Enjoy this refreshing and delicious Watermelon and Tomato Salad… The colors, and freshness of this chilled salad will make any summer dinner table a pleasure to look at and more so – a delight to eat. If you have never had this salad – you have to make it… and if you have had it, then you can appreciate the simplicity of it.
For this – you need: Fresh Garden tomatoes, mint, watermelon, feta cheese, s&p, Olive oil, and balsamic vinegar…
Cut the tomatoes in half and then slice the halves into slices (you understand what I mean – no?). Next slice the watermelon and cut away from the rind… cut into cubes and place a large bowl. Now add the tomatoes, crumbled feta and chopped fresh mint… Drizzle with Olive oil and a splash of Balsamic – season lightly with s&p… (you can also hit it with a smidge of sugar) … cover and place in the fridge to keep chilled. Spectacular.
Buon Appetito
