New York Stock Exchange traders
The stock is likely to hit new highs in June, but the extent of the market’s gains will depend on how much inflation threatens and whether it will prompt the Federal Reserve to discuss tougher policy.
Looking back over the past 20 years, June has historically been a weak month for stocks. But Instinet states that S&P 500 There has been a better track record lately, increasing every June since 2016. Over 20 years, it averaged a monthly decline of 0.6% and was negative 11 times.
Instinet also noted that over two decades, the S&P 500 was at an all-time high in the first half of the month before falling to a multi-month low in the second half.
The S&P 500 started the first trading day of June with a jump, reaching within 4 points of its all-time high of 4,238. But till noon it remained negative and closed down 2 points at 4,202.
The benchmark sits less than 1% from its intraday all-time high.
The biggest concern for the stock has been inflation, and recent readings for inflation have been higher than expected.
“I really think it’s about inflation, inflation, inflation and rates, rates, rates,” said Peter Bookover, chief investment officer at Blakely Advisory Group.
The market’s focus is already on the June 15-16 Fed meeting, which is seen as the most important market event of the month. Inflation measures like the May Employment Report Friday and the Consumer Price Index will also be important.
Strategists say the market could hit new highs, but it could be choppy if inflation warms up more than expected or the Fed makes a loud noise.
Inflation is a double-edged sword for stocks. On the one hand, companies that can pass on higher costs in the form of higher prices have pricing power and can help increase earnings. But if inflation heats up too much, it can eat away at profit margins. If it continues to rise, it could prompt the Fed to raise interest rates, which increases borrowing costs for companies and threatens returns, especially for growth stocks.
Morgan Stanley’s chief US equity strategist Mike Wilson noted that the June 10 release of the consumer price index could be a pivotal date for the market this month.
“Inflation expectations have also exceeded expectations that can be achieved in the near future. Inflation is in our view and will eventually exceed the Fed’s targets on a sustainable basis,” Wilson said. “However, expectations have also risen and now many asset markets are priced at this increase.”
Wilson said the CPI release could be a “sell-the-news event that could negatively impact many crowded trades.”
So far, the Fed has said inflation is fleeting, and the price data looks hot as it is compared to the weak period last year. But the worry is that if that doesn’t happen, the Fed will have to take action to stop rising prices. That means it could start reducing its bond purchases sooner than expected and eventually raise interest rates sooner.
“I don’t think you’re going to prove that until inflation drops,” said James Paulson, chief investment strategist at Leuthold Group. “If it’s still hot in the fall, we have a problem. I think the chances on that are slim. Everyone knows we’re going to get hot inflation numbers. We know that, at least in part.” Why.”
Paulsen also doesn’t expect the stock market to bounce back until a fall anytime soon. He said valuations should be helped by stronger earnings growth, and he expects economic data to start coming in better than expected.
Scott Radler, partner at T3Live.com, expects the S&P 500 to trade new highs in June, but said the market is tentative ahead of jobs data. “The market is waiting to see what’s going to happen with the jobs report on Friday,” he said.
The Fed has stressed that it will be patient while keeping its policy easing as the labor market and economy recover. Treasury yields have remained trapped below highs in early April due to an April jobs report and other data that missed expectations. On Tuesday, the benchmark 10-year was 1.60 per cent. Yields move at the opposite price.
However, a comment on Labor from St. Louis Fed Chairman James Bullard surprised some market professionals.
Bullard told the Financial Times Despite the economy having under 8 million jobs, the labor market may be tighter than it looks. If so, it would suggest that the Fed may be on a faster track to raise interest rates higher than expected. Economists expect 674,000 jobs to be added in May, a sharp increase from 266,000 received in April, according to the Dow Jones.
Quincy Crosby, chief market strategist at Prudential Financial, said the weak job numbers could be more favorable to the market. “If we have weak numbers, not as strong as the market expected, we may have new [stock market] High,” he said. “It shows the Fed remains stable.”
But she said the market could be shaken if inflation is higher than expected and sparked speculation that the Fed may begin to slow its asset purchases.
The Fed changed its policy on inflation last year so that it can now tolerate a threshold for inflation where it can run above its former 2% target for some time. Ending the bond program is seen by the Fed as the first step toward raising interest rates, which most strategists don’t expect until 2023 at the earliest.
Recently, Fed officials have said they expect to begin discussions on tapering bond purchases in upcoming meetings.
“They have already offered language regarding the ability to discuss the pace of monthly purchases. Any language that becomes bullish will be picked up by the market,” Crosby said. “The market is too weak to understand the timing of how the Fed is thinking and how the Fed interprets the data.”
Mark Chandler, chief market strategist at Bannockburn Global Forex, said the tone of the market’s move in June remains “at risk”.
“I think that’s what the currency markets are saying. Sterling hits a new 3-year high. The Canadian dollar hits a new 4-year high. Gold is up,” he said. “The underlying tone of the dollar is weak. It tells you it is at risk.” He added that riskier assets like stocks should continue to perform well until the returns start to rise significantly.
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