When this year began, the prediction was a market surge stemming from a shift out of the “Magnificent 7” stocks and into the wider market. The recent days seem to reflect that scenario. On Thursday, the S&P 500 achieved another all-time high, albeit with small losses in the technology and communication services sectors. This shift is evident in the heatmap reflecting Thursday’s trading.
What stands out even more is the Russell 2000 small-cap index upsurging by 2.6% on Thursday, and the equally weighted version of the S&P 500 escalating by 1.2% to a new all-time high.
Some argued that narrowing breadth would stifle the uptrend of the market. However, it seems that the skeptics may soon be proven wrong as the breadth continues to improve, aligning with the market analyst’s expectations of a broader uptrend and leaving the bears scrambling to justify their apprehensions.
However, these gains were halted when the Producer Price Index (PPI) for January surpassed expectations. Just as seen with the Consumer Price Index (CPI) earlier in the week, the PPI inflation caused a slight pullback in the market. But these fluctuations do not seem to rattle the overall market trajectory.
Contrary to the bears’ claims, the inflation news seems to cause an overreaction. The rise in core services prices within the PPI is largely due to beginning-of-the-year price hikes, akin to previous years. Therefore, this increase is not indicative of a sustained trend, and similar to previous years, may end up being a non-factor.
It’s crucial to remember that Producer prices have historically fallen as fast as they rose. The recent rise in producer prices is not an isolated incident but a normal fluctuation that should soon stabilize.
The discussion surrounding the continuation of the disinflationary trend in both consumer and producer prices is vital for understanding Fed policy this year. The January speed bump in prices has pushed out the consensus view of when rate cuts might begin. Nevertheless, the overall market performance indicates a resilience that may not be significantly undercut even by a delayed initiation of rate cuts.
The rotation observable over the last week, with technology and communication services being the only two sectors posting losses, might indicate a mere temporary pullback required to resolve the overbought condition faced by the markets at the beginning of the year.
Alleviating concerns about consumer and producer price inflation is the inevitable rebalancing of spending patterns. The expected shift towards increased spending on goods over services should alleviate core services price inflation. Furthermore, a modest housing market recovery could boost expenditure on durable goods.
While inflation concerns loom, the Federal Reserve closely monitors the personal consumption expenditures (PCE) price index, which supports a more positive outlook. The headline PCE is already at 2.6%, while the core rate is at 2.9%. The alignment with the Fed’s target of 2% substantiates the predictions leading to an easing cycle.
Furthermore, the restoration of annualized corporate profit growth lends support to the continuation of a bullish market in 2024. These factors form the bedrock for a promising market outlook.
