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After four straight months of gains, the market’s nearly 12% rise since the start of the year may seem like a reason to fireworks and celebrate. Still, many investors are constantly worried that higher inflation will force the Federal Reserve to stop buying assets or even raise interest rates sooner than expected. And then there’s one of Wall Street’s favorite sayings, “sell in May and go,” which suggests avoiding the market altogether until after September.
While concerns may linger in the background, they are not reflected in stock prices at this time. Additionally, the CBOE Volatility Index, commonly referred to as the VIX, is near 2021 lows, indicating that professional investors expect low volatility in the market over the next 30 days.
But look beyond stock prices, and you may find other signs of a change in sentiment. CNN’s Fear and Greed Index has seen a pretty dramatic turn over the past month, from a “greed” reading of 61 to a “fear” reading of 39 on a 100-point scale. . Meanwhile, individual investor optimism over the six-month outlook for stock prices fell in late May to the lowest level since October 2020, according to the American Association of Individual Investors’ weekly sentiment survey.
Watch for more information from the June Fed meeting on any potential monetary policy changes to come, and keep an eye out for major economic data releases to better understand the current state of inflation.
Waiting for the Fed to change your tone
The Federal Reserve is scheduled to meet for one of its eight annual meetings on June 15 and 16. As in recent meetings, market participants do not expect any major changes in monetary policy, which means policymakers should leave interest rates near zero and continue to buy $ 120 billion worth of money. bonds every month.
At some point in the next few months, Fed policymakers will need to change their message, notes Jay Hatfield, founder, CEO and portfolio manager of the InfraCap MLP ETF at Infrastructure Capital Advisors. This is because the central bank’s position that inflation is “transient” is increasingly at odds with its action to continue buying bonds, which increases the money supply in the economy and can fuel inflation, he says.
“The idea that they are not going to decrease and that inflation is transient is not sustainable,” Hatfields says. While policymakers can “stick to their guns” during the summer over the current message, he believes they will either drop their claim that inflation is temporary or start pushing the market down. comfortable with the idea of reducing bond purchases, he adds. .
“Fed oversight is still essential,” Hatfield says. “If you get the right policy from the Fed, you get the right deal” in terms of the direction it’s headed, he adds.
Ernesto Ramos agrees that the central bank’s messages will start to change in the coming months. April meeting minutes showed that the topic of tapering has been brought up, so when it starts will be more of the focus, adds Ramos, chief investment officer of BMO Global Management. of assets.
“I think that’s going to be more and more a topic of conversation,” says Ramos. And it is bond purchases, rather than raising interest rates, that will be the Fed’s first priority, he notes. For now, traders see only a 7% chance of a rate hike by the end of the year, and policymakers have vowed to keep rates low for the foreseeable future.
Key economic data: PCE inflation, jobs and GDP
Speaking of inflation, the market will get a sneak peek at the Fed’s preferred price measure, the May Personal Consumption Index (PCE) on June 25. costs, was higher than economists had expected, but less than some people on Wall Street had feared.
Neither Ramos nor Hatfield believe that higher inflation will be temporary, as the Fed has repeatedly promised. “We see the potential for bad news on the inflation front,” Ramos said. Hatfield adds, “We are bearish on inflation; we think it will speed up, not slow down.
Even earlier, Ramos said the monthly jobs report for May, scheduled for release on June 4, could be “a pretty interesting day” for the market. That’s because the April report showed a huge slowdown in hiring, so investors will be watching if some hires spilled over in May, which would be “very good news, economically speaking,” he adds.
A strong job market, however, could drive benchmark 10-year Treasury bond yields higher and cause equity investors to continue to favor value stocks over growth stocks, Ramos notes. Coupled with the pace of economic growth and the relative optimism of American consumers, the jobs report could also lend more credence to the inflation argument, he adds.
Consumer confidence, for example, remained stable in late May, above pre-lockout levels, according to the weekly Ipsos-Forbes Advisor US Consumer Confidence Tracker.
Meanwhile, Hatfield says he’s watching the price of oil, which he plans to hit as high as $ 80 a barrel by the summer from the current range of $ 60. Trevelgeddon, an increase in travel expected this summer, could also see the average price of a gallon of gasoline hit $ 4, down from just over $ 3 now, he adds.
Finally, Hatfield says he checks a gross domestic product (GDP) forecast tool from the Atlanta Fed on a daily basis. At present, that estimates economic growth of 9.3% in the second quarter.
How to invest in June
Inflation remains the key issue for the market, and inflation jitters should keep the S&P 500 in a fairly narrow range until early July, according to Hatfield. In July, companies will begin reporting their second quarter results. Until then, Hatfield doesn’t think the S&P 500 will go much beyond 4,200.
Additionally, there is no clear catalyst to push the market much higher in the near term, according to Ramos. “What other good news could keep the market going up? ” he says.
In the short term, Hatfield says value stocks remain more attractive than growth stocks. And Ramos says that an allocation that is “a little” more exposed to small caps makes sense because those stocks are more sensitive to the economy.
Finally, Ramos says the market is “ripe for some volatility” in the summer, and potentially a market correction, although investors cannot predict the cause at this time. “Something out there is going to create some turbulence at one point or another,” he says.
Ramos recommends waiting at least until the June 4 jobs report. If this report exceeds economists’ expectations, then invest in value stocks. If it’s lower than expected, invest your money in growth stocks, he recommends.