MANHATTAN (CN) — Pulling out the stops for a positive week, insouciant investors focused less on new data showing higher inflation and more on what the Federal Reserve will do as the month progresses.
Markets received the less-than-desirable news Thursday that inflation had seen its largest year-over-year increase since the early days of the Great Recession. And yet investors kept on investing, with the S&P 500 closing out Thursday’s market at a new record, hitting 4,239 points.
By Friday, Wall Street had a mixed outing. The Dow Jones Industrial Average lost about 270 points for the week, while the Nasdaq gained about 200 points. The S&P kept its lead from Thursday, but managed to add only about 18 points for the week.
“Often times, stock and bond markets react in ways that are very counterintuitive,” wrote James Vogt at Tower Bridge Advisors. “Inflation was already expected and May is supposed to be the highest CPI reading this year. Comparisons get easier going forward, meaning inflation peaked last month. We’re past that news cycle.”
Some experts point to the Federal Reserve for an explanation for the market’s incongruous reaction to seemingly bad news.
“The simple answer is, the market’s line of thinking is that a weaker than expected labor market may very well cause the Fed to keep its foot on the monetary gas pedal and, therefore, delay making any policy adjustments or even talking about the possibility of making adjustments,” wrote Scott Wren, senior global market strategist at Wells Fargo in an investor’s note.
Wren noted his belief that “the easy money policies of the Fed will last for some time” but that the central bank may back out of its $120-billion-a-month purchases of bonds, a process known as tapering, starting in the fall.
If the Fed moves too quickly, that could be the factor that spooks investors. “Stocks have seen a significant bounce-back following the pandemic, driven by massive stimulus measures by governments and central banks worldwide,” wrote analyst Milan Cutkovic at AXI Trader. “Should market participants see the Fed cutting back too early on this, another sell-off would seem inevitable, and growth stocks could see the biggest losses.”
Supply is easily outpacing demand, some experts say. “We are forecasting output will end the year higher than it would have done if there had been no pandemic and the economy had instead continued along its 2014-2019 trend,” wrote James Knightley, chief international economist at ING. “However, the pandemic has led to scarring in the economy that means we are concerned that supply capacity won’t be able to cope with the scale of demand.”
Knightley noted that housing component sales will be a good indicator over the next year at where inflation truly stands. “Movements in these components tend to lag 12-18 months below house price developments,” he wrote. “This means that the housing components may well be the story to watch through the second half of this year.”
The Federal Open Markets Committee is scheduled to meet next week, and investors will comb through Fed Chair Jerome Powell’s statements regarding any hint toward tapering asset purchases or possibly raising interest rates.
Investors don’t seem to be the only ones nonchalant about inflation. The University of Michigan’s consumer confidence survey showed a slight increase in confidence this month, from 82.9 to 86.4 on the headline index. The index of current economic conditions also inched up slightly, from 89.4 in May to 90.6 so far this month.
Besides inflation, household wealth is also increasing. According to data from the Fed, the household balance sheet rose to $154.2 trillion, gaining nearly $25 trillion since the lockdowns began hit at the end of March 2020. Most of the financial wealth gains are due to investing by corporate entities and mutual funds, which has led to the wealthy becoming wealthier.
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