Resetting the Clock

One month may be an anomaly. Two months could be a coincidence. Three months may be a trend. That’s a useful way of thinking about inflation and the current path on interest rates.

We came into the year believing inflation was well on its way to being tamed. And, with no serious economic damage. What a win! But, then came January’s hotter inflation read.

“Just a fluke,” was the basic Wall Street vibe.

“Just a fluke,” was the basic Wall Street vibe.

Then another one in February.

“Just a couple one-off issues.”

And another in March.

And another in March.

“Okay, maybe there’s something here.”

Who knows where inflation goes from here, but it appears we’ve got a new narrative: inflation progress has stalled. And, with that, so too is the market’s expectation we’ll soon see interest rate cuts.

Since we broke trend, we need to reset the clock. We need to see one good inflation number, then another and another. We need to see a new trend of disinflation over the next few months. That’s why rate cuts that had been priced into the summer have now been kicked into the fall.

Since we broke trend, we need to reset the clock.

The Fed has also changed its thinking. Virtually every Fed member including Chair Jay Powell has they need more confidence on inflation progress before shifting gears.

The bond market has been bracing for this for weeks which is evident when you see yields spiking—the 10-year Treasury reaching north of 4.6% this week.

The stock market, however, has been a bit slower to react. Only in the last week or so have we seen more selling. The index is off about 5% from its recent high, but the tepid selloff has been very benign in nature.

The stock market, however, has been a bit slower to react.

The bullish sentiment and narrative surrounding AI still seems to be intact, at least for the moment.

It’s for this reason, earnings are so important this quarter. If rates are going to stay higher for longer, we need to see earnings start to really accelerate.

So far, we haven’t seen that acceleration, but it’s early. We’re less than two weeks into the reporting season. The mega cap tech companies, that weigh so heavily in the market, have yet to report.

So far, we haven’t seen that acceleration, but it’s early.

We’ll learn a lot more in the coming weeks.

Again, if you got caught up in the latest surge in the stock market believing we’re on a rocket ship to the moon, take time now to rethink your portfolio.

Ebbs and flows are a part of the process and we’re in the perfect window for reassessing your situation without much damage. Take advantage of it.

Ebbs and flows are a part of the process and we’re in the perfect window for reassessing your situation without much damage.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.