Leading up to last week’s May consumer price index (CPI) report and the June interest rate decision from the Federal Reserve, equity markets were treading water a bit. That’s typical when markets lack visibility, allowing negative views and concerns to become prevalent.
However, we believed the Wednesday CPI report would mark a positive turning point for stocks, and it did. Markets saw an immediate pop Wednesday morning after the CPI report was released and continued to strengthen throughout the week.
May’s “core CPI” reading, which excludes energy and food costs, was a huge downside figure that came in at 0.16% month-over-month versus an expected consensus of 0.28%. This is a meaningful improvement from the 0.36% and 0.39% monthly readings from the start of the year that increasingly appear to be the outliers.
The biggest downward driver was auto insurance. Last month, auto insurance added 0.06% to Core CPI, while this month it was 0%. This is a huge difference and a major positive sign the auto insurance surge is peaking.
As our readers know, we’ve previously said CPI was being held up by housing and auto insurance costs. Now one of them is breaking:
Furthermore, immediately following the CPI report, the federal funds rate futures rate cut expectation jumped from 1.5 cuts earlier in the week to 2:
Why is last week’s data so important? Stocks rallied five and 10 days after Fed interest rate decisions in five of the most recent six instances supported by slowing inflation data:
Knowing this, we think an even stronger positive move may occur after the extraordinary softness from the CPI report because inflation momentum has shifted downwards significantly. Encouragingly, the other lagging indicator, housing, is beginning to catch up to market readings:
Putting a bow on this, perhaps the most important factor is there’s enough data to show the composition of the CPI is much healthier overall. For instance, the percentage of CPI components with inflation below pre-pandemic averages is now 55%, which is above the 50% average since 1980:
In other words, roughly half of the CPI components have inflation rates below their pre-pandemic averages. Also, surveys of manufacturing and services producers show prices-paid readings are back to or below pre-pandemic averages:
These are early indicators of actual deflation. And that’s without housing joining the party yet.
Why Invest?
Some people like to spend money on material things. Others enjoy accumulating. Some like to give. And some just want to win the game of having the most.
At Cornerstone, we help clients develop plans to achieve their “whys.” Personally, I invest to spend on experiences like travel, which requires money.
Making money is a goal of investing for everybody. But it’s not the ultimate goal because money is a tool to have the means to accomplish other things.
CFS exists to help achieve our clients’ goals. That’s why it's so important that our method relies exclusively on cold hard data, not emotion. Hence, we like the phrase, “You must know where you’ve been to know where you’re going.”
So, let’s look at the recent data that led up to last week’s CPI report with an eye towards the future.
We’ll start with MAPsignals’ trusty Big Money Index (BMI), which is a 25-day moving average of “big money” professional investor netted buys and sells. April saw money flowing out of stocks, May showed a strong reversion, while early June saw a pause yet still had notable inflows:
This is supportive when looking at daily individual counts for unusually large buying and selling. From May into June, buying has been strong while selling remained subdued:
Going deeper, buying was nicely distributed across different sectors, continuing the 2024 theme of breadth in the market:
This is markedly different than last year, when technology stocks alone often accounted for 30%-40% of weekly buys.
Stopping there would seem rosy, but it's important to look at both sides of the coin. As we've seen in the beginning of June, technology stocks experienced their highest level of selling since last October:
On May 30 alone, 44 tech stocks were sold in an unusually large way. But why? While not trumpeted in the media, the catalyst for the selling was disappointing earnings and guidance from Salesforce.com, Inc. (CRM) #.
This led to the entire software industry taking a beating. In the last week alone, 74 software stocks showed unusual buying or selling, with 57 of them being sells. Given how software is a growth engine, this produced a disconcerting perspective and was enough to sow the seeds of fear and doubt in the market leading up to the CPI report. However, the CPI report helped alleviate some of those concerns.
From a contrarian perspective, if we dig further, such capitulation and resignation from tech investors turns out to be excellent news for bulls. Going back to 2013, there were 78 days when 44 or more technology stocks were sold. When this happens, forward returns are extraordinarily positive (including all instances 24 months out):
Furthermore, there was reasonable breadth of buying across pretty much every sector.
Overall, things look good and stable, especially coming out of the CPI report. Stocks are at or near all-time highs. Also, there was some tech capitulation that historically indicates these stocks should soar going forward.
And there's one last bit of good news. Both the S&P 500 and BMI rose in five out of 10 trading days from May 9-21:
Since 1990, this setup has happened on 577 out of 8,648 possible trading days, or only 6.7% of all instances. It is rare and bullish – forward returns are excellent:
In summary, the CPI report from last week is extremely bullish and there are more supportive tailwinds and bullish indicators highlighted in today's data review. Still, we acknowledge this is an election year, though we'll almost certainly see interest rates fall sooner rather than later. Cuts are already happening in Europe and there are probably more on the horizon there.
All in all, to achieve your investing goals, we think it’s prudent to take a page from the Rebel Alliance playbook:
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* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
# Cornerstone owns Salesforce.com in some client accounts.
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