How far can the US stock market go with a good start in May.
After experiencing a downturn in April, the US stock market began a good start in May.
The dovish stance of Federal Reserve Chairman Powell after the interest rate decision boosted the market, followed by signs of labor market softening and hope for interest rate cuts in the non-farm report. US bond yields have peaked and fallen, technology stocks have once again led the market up, the S&P 500 index has once again challenged its 50 day moving average, and the panic index VIX, which measures market volatility, has dropped to its lowest level since the end of March.
In the coming week, corporate financial reports will continue to be a disruptive factor, while investors will pay attention to the latest statements from Federal Reserve officials on policy stance.
(“Powell’s statement boosts the market (source: Xinhua News Agency image)”,)
The Federal Reserve reiterates patience
The Federal Reserve kept interest rates unchanged last week. The resolution statement stated that there is a lack of progress in achieving the target of restoring inflation to 2%, and the committee remains highly concerned about the risks posed by price increases. The Federal Reserve reiterated that it is not expected to cut interest rates until there is greater confidence that inflation rates can continue to fall to 2%. Powell subsequently stated that the next step is “unlikely” to be a rate hike, and stated that the current level of policy restrictions should be able to effectively reduce inflation.
Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that Powell’s statement is more dovish than expected, and the door to interest rate cuts later this year has not closed. “Of course, this requires future data to match. Some of the recent increase in consumer prices is attributed to the remaining seasonality and special factors, but housing inflation is still a troublesome factor. According to market data, housing inflation will take longer to subside, but it is coming.”
The signs of economic slowdown also suggest that policy turning points may rebound. Last month, the United States only added 175000 new jobs, the smallest increase since September last year. The unemployment rate slightly increased from 3.8% to 3.9%, and the month on month salary growth rate fell to 0.2%. The previously announced number of job vacancies in JOLTS has dropped to 8.5 million, the lowest level in over three years, further confirming the cooling of the labor market.
In addition, the Institute for Supply Management (ISM) Service Industry Index has once again fallen below the boom bust line after 15 months, combined with the previous stagnation of manufacturing recovery across the United States, indicating that the pressure of economic slowdown has intensified.
The yield of US treasury bond bonds fell to the lowest level in three weeks, and the market began to reassess the point where the Federal Reserve cut interest rates. The 2-year US Treasury, closely related to interest rate expectations, fell from nearly 5% two weeks ago to 4.80%, while the benchmark 10-year US Treasury fell below the 4.50% mark at the end of the trading day, both marking the largest weekly decline since December last year.
Regarding the drastic changes in interest rate pricing, John Lynch, Chief Investment Officer of Comerica Asset Management, believes that the market narrative has shifted from hope for interest rate cuts to optimism about economic strength. However, any signs of slowing demand will bring monetary easing policy back to the table.
Schwartz told First Financial that sustained inflation and economic growth have made Federal Reserve officials cautious when lowering interest rates, but Powell denied concerns about stagflation. “The latest employment data will help Federal Reserve officials regain confidence that inflation rates can recover to 2%.” Schwartz believes, “Now it seems that the Federal Reserve may take action in September, but there are still many variables. The overall labor market is still healthy, and the Federal Reserve needs to see several positive inflation data before cutting interest rates.”
The market rebound is expected to continue
Last week, the US stock market initially suppressed and then rose, with expectations of interest rate cuts and non farm reports reigniting risk appetite. The S&P 500 index has returned to 5100 points, only 2.5% away from its historical high.
The financial reporting season has passed halfway, and positive performance has also become the driving force for the market rebound. As of last Friday, 77% of S&P constituent companies that had already announced their performance had better than expected profits. Analysts currently predict that the net profit of the US stock market in the first quarter will increase by 6.6% year-on-year, a significant improvement from 5.1% at the beginning of last month.
Technology stocks continue to be the focus. Google’s market value has stabilized at $2 trillion, while Nvidia’s stock price is approaching $900. The former “stock king” Apple’s announcement of repurchasing $110 billion in stocks has once again become a market focus. With the company expanding its artificial intelligence research and cooperation, and the upcoming spring press conference this month, investors are betting that Apple can reignite consumer enthusiasm through new products.
Regarding the rebound, Ryan Detrick, Chief Market Strategist at Carson Group, a research firm, said, “Powell’s position has not been much shaken. He acknowledges that inflation remains a problem, but remains optimistic that prices will improve in the coming quarters.” He added, “It is precisely because of the Federal Reserve Chairman’s strong counterattack on interest rate hikes that bulls are able to control the situation.”
The flow of funds shows that US investors have been net sellers of stock funds for the fifth consecutive week. According to data provided by the London Stock Exchange (LSEG) to First Financial reporters, investors have cumulatively reduced their holdings by $5.48 billion. However, there is strong demand for large cap stock funds, with a net purchase of about $1.2 billion, mainly boosted by strong profits from Google and Microsoft. At the same time, money market funds net bought $26.53 billion, returning for the second consecutive week.
Jiaxin Wealth Management wrote in its market outlook that the weak employment report and Apple’s financial report have given the market hope again. Despite the high uncertainty surrounding the inflation path, economic outlook, and Fed rate cuts, investor sentiment has once again shifted towards bullish positions.
The institution believes that there will be little economic data on the calendar for the next week, and corporate profit reports will receive more attention. Considering the improvement in market risk appetite, the short-term rebound outlook is more optimistic. Especially, the S&P 500 index has returned to its important short-term moving average of 50 days, indicating that investors are expected to further be bullish.