Stocks fell slightly on Friday but still scored strong gains for the week, as investors celebrated a pause in rate hikes by the Federal Reserve. Two important inflation measures during the week  supported market expectations. The consumer price index report for May showed a Y/Y deceleration in both the headline number and the core CPI figure. Additionally, the producer price index report for May came in, with the headline number falling more than expected on a M/M basis and trailing the consensus on a Y/Y basis. Investors chose to overlook the Fed’s signal that further rate hikes are in the offing, instead expecting the central bank will have to end its aggressive tightening cycle sooner rather than later. For the week, the Dow Jones average rose 1.3%, the S&P 500 climbed 2.6% – the index’s fifth straight weekly gain and its best performance since March – and the Nasdaq Composite jumped 3.3% for its eighth winning week in a row. The S&P and Nasdaq hit their highest levels since April 2022 this week.

Fed officials are rethinking their view that wage gains are fueling inflation, a key intellectual shift that bolsters the case for a pause in their tightening campaign for the rest of the year. Given that investors have been waiting most of this year for the Federal Reserve to ‘pivot’ from its tight monetary stance, the stock market appears to be looking beyond interest rate hikes and inflation. But, is the market getting it wrong again?

Future Wealth’s View

The fact is that no one really knows what the Fed will do next month. While they have expressed a desire to raise interest rates one or two more times, the market is dismissing it and that is a big risk for all investors who are pouring money into the stock market. Mixed economic signals have made the Federal Reserve’s job especially difficult. The labor market continues to show resilience, with an unemployment rate of 3.7% hovering near 50-year lows. Additionally, job vacancy rates have increased, with more than 1.5 jobs available for every unemployed person, and the consumer confidence numbers have increased in 8 of the last 10 months. However, overall GDP growth has slowed from the previous two quarters but the annualized growth rate of 1.6% is still higher than what was seen in the last quarter of 2022.

Given this backdrop, we believe that pent up investor pessimism and fear of missing out will continue to drive markets higher albeit in undervalued, cyclical sectors. However, investors would be wise to proceed cautiously.