Inflation, rate hikes, and consumer health
May was an eventful month in the U.S. financial market, with volatility on display for major U.S. equity indexes. The volatility came courtesy of interest rate hike uncertainty, persisting inflation, a mixed earnings picture (especially for retailers), and soaring energy prices. But all’s well that ends well!
Just when it seemed like the sky was falling, major U.S. stock indexes found buyers[i] in the final trading days of May, sending the S&P 500 into slightly positive territory for the month and snapping a 7-week losing streak–the longest since 2001. This development is a great reminder of the potential benefits of long-term investing.
The Personal Consumption Expenditures (PCE) Index showed a downtick in the most recent reading, rising 4.9% year-over-year[v], a deceleration from March. The Federal Reserve’s favorite inflationary metric could be an early indicator of an inflation plateau in the works, only time will tell.
The PCE Index data was released towards the end of the month. Earlier in May, Consumer Price Index (CPI) data showed a mixed picture, too–with prices still running near 40-year highs[vi] at an annualized rate of 8.3%, but down from the March reading of 8.5%.
These metrics are of great interest to the collective marketplace as we continue to hunt for signs of peak inflation.
50-Basis-Point Rate Hike
The widely expected 0.50% Federal Funds interest rate hike went into the history books in May. More Federal Reserve rate hikes are expected at the June and July Fed Meetings, with the CME FedWatch Tool[vii] currently showing a 96 percent chance of another 50-basis-point hike in June.
Federal Reserve Chair Jerome Powell broadcast that the Federal Open Market Committee (FOMC) was not currently considering any 0.75% interest rate hikes[viii]. Markets liked hearing this, as they are accustomed to 0.25% changes at each interval.
Personal spending increased by 0.9%[xiii], beating market expectations of a 0.8% jump. While consumers continue to spend more dollars to offset inflation, we are also keeping an eye on consumer credit[xiv], which has been on a rather meteoric rise.
While the consumer looks good on paper, these metrics do not factor in the weaker purchasing power of the U.S. dollar domestically, courtesy of inflation. Should inflation metrics continue to fall or at least go sideways, it will be valuable information to see how consumer behavior reacts during the process.
May featured plenty of volatility for the majority of the month, but major U.S. equity indexes found their footing in the final trading days of the month, with the S&P 500 ending May virtually unchanged.
You may have heard of “Sell in May and Go Away[xv],” an old Wall Street adage that conjures up thoughts of brokers in Long Island for the summer. Is that what “they” did this year? As we move into June, we’ll see how the market performs, and we’ll be paying careful attention to inflation metrics and Fed interest rate decisions.
As always, we are here if you need us!
Disclosure: Emerald Advisors, LLC is a registered investment adviser. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
[i] McCormick, E. (2022, May 27). Finance.yahoo.com. Stock market news live updates: Stocks rally to end 7-233k losing streak, S&P 500 logs best week since Nov. 2020. [Online] Available at: Stock market news live updates: Stocks rise, S&P 500 looks to snap 7-week losing streak (yahoo.com)
[v] Cox, J. (2022, May 27). cnbc.com. The Fed’s favorite inflation measure rose 4.9% in April in a sign that price increases could be slowing. [Online] Available at: The Fed’s favorite inflation measure rose 4.9% in April in a sign that price increases could be slowing (cnbc.com)
[vi] Cox, J. (2022, May 11). cnbc.com. Inflation barreled ahead at 8.3% in April from a year ago, remaining near 40-year highs. [Online] Available at: CPI April 2022: Inflation barreled ahead at 8.3% in April from a year ago, remaining near 40-year highs (cnbc.com)
[vii] (2022). cmegroup.com. CME FedWatch Tool. [Online] Available at: Countdown to FOMC: CME FedWatch Tool (cmegroup.com)
[viii] Cheung, B. (2022, May 4). Finance.yahoo.com. Powell: Fed not currently considering 0.75% interest rate hikes. [Online] Available at: Powell: Fed not currently considering 0.75% interest rate hikes (yahoo.com)
[ix] Culp, S. (2022, May 25). Reuters.com. Wall Street rallies as Fed minutes meet expectations. [Online] Available at: Wall Street rallies as Fed minutes meet expectations | Reuters
[x] Cox, J. (2022, May 6). Cnbc.com. Payroll growth accelerated by 428,000 in April, more than expected as jobs picture stays strong. [Online] Available at: Payroll growth accelerated by 428,000 in April, more than expected as jobs picture stays strong (cnbc.com)
[xi] (2022, June 3). Bls.gov. Economic News Release: Employment Situation Summary. [Online] Available at: Employment Situation Summary – 2022 M05 Results (bls.gov)
[xii] (2021, October 15). Nasdaq.com. U.S. Retail Sales Unexpectedly Continue to Climb in September. [Online] Available at: U.S. Retail Sales Unexpectedly Continue To Climb In September | Nasdaq
[xiii] Amadeo, K. (2022, June 21). Thebalance.com. How Do Consumer Spending Trends Impact the Economy? [Online] Available at: Current Consumer Spending Rate in April: 0.9% (thebalance.com)
[xiv] (2022, May). Tradingeconomics.com. United States Consumer Credit Change. [Online] Available at: United States Consumer Credit Change – May 2022 Data – 1943-2021 Historical (tradingeconomics.com)
[xv] Segal, T. (2022, May 5) Investopedia.com. Sell in May and Go Away Definition. [Online] Available at: ‘Sell in May and Go Away’ Definition (investopedia.com)
Copyright © Levitate