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The S&P 500 index entered bull market territory last week, trading 20% above 52-week highs. U.S. investors experienced its longest bear market since 1948, lasting 248 trading days. The shift back to a bull market took place despite aggressive interest rate hikes by the Federal Reserve, regional banking collapses, and persistent fears of a recession that hasn't fully manifested.
Expect S&P 500 stocks to remain volatile in the near-term
According to Yahoo Finance, Ryan Detrick, Chief Market Strategist at Carson Group, warns that the journey up for stocks might take a lot of work. He studied 13 instances since 1956 where stocks rebounded by 20% from a 52-week low. Typically, the first three months show instability, with the benchmark index averaging a 0.5% decline in the first month after hitting bull market territory.
However, the long-term view is quite optimistic. Detrick's research shows that after a 20% rebound from market lows, the S&P 500 typically returns 10% over the next six months and 17.7% over the following year.
Despite these optimistic projections, the road to higher stocks may still be bumpy. On Wednesday, markets expect the Federal Reserve to halt its interest rate hike process, which isn't necessarily good news for stocks. Economists predict that the Federal Reserve's pause may be in anticipation of the "lagging impact" of its fiscal policy.
Should this be the case, it could result in slowed economic growth, which might lessen inflation but pressurize earnings growth. Morgan Stanley recently referenced this scenario when they forecasted a 16% drop in corporate profits by year-end.
Inflation is on the radar of the Federal Reserve
This Tuesday, we'll be awaiting May's latest Consumer Price Index (CPI), as released by the Labor Department. The CPI is anticipated to have increased by 0.2% in May, showing a slight deceleration from the 0.4% increase in April. The forecast for the annual rate is 4.1%, marking a decrease from the previous month's 4.9%.
As for the core CPI, which leaves out the more fluctuating food and energy prices, it's predicted to have risen by 0.4% in the past month and by 5.3% year-over-year, down from April's 5.5%.
The Producer Price Index (PPI) for May, reflecting wholesale inflation, is set to be released on Wednesday. After the 0.2% increase in April, producer prices are predicted to have dipped by 0.1% in May, with the annual rate likely slowing down to 1.5% from 2.3% in the previous month.
The Federal Reserve's Federal Open Market Committee (FOMC) will announce its decision on interest rates. With the last ten meetings resulting in rate hikes to temper inflation—which, while below its 2022 peaks, still remains high—the central bank is widely anticipated to hold off on further hikes in the upcoming meeting. The Fed funds rate is expected to stay in its 5-5.25% range, and the CME Group's FedWatch Tool currently shows a 74.8% probability of a rate hike pause.
The Census Bureau will deliver an update on U.S. retail sales next week, providing insights into consumer spending patterns and the impact inflation has had on these. After two months of falling numbers, U.S. retail sales are projected to have increased by 0.5% in May, following a 0.4% rise in April, as shoppers wary of inflation start spending again. In April, online shopping and food saw a surge in sales, whereas home furnishings and electronics sales took a hit.
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