The S&P 500 broke 4,200 last week, its highest since last August. But that’s not necessarily something to celebrate.
Investors are “panic buying,” Morgan Stanley equity strategist Mike Wilson said in a Monday note to clients. “We believe this rally will prove to be a head fake like last summer’s.”
UBS echoed that sentiment, saying markets aren’t pricing in tighter credit conditions and slower economic growth. There’s a “better risk-reward” to be found in bonds and emerging-market stocks, wrote UBS’ Vincent Heaney.
And the direst warning of all: Investors are “braced for Armageddon,” according to Stephen Suttmeier, technical research strategist at Bank of America. Suttmeier cites investors being underexposed to stocks, and funds being “aggressively short.”
Yesterday the S&P was virtually unchanged. While that doesn’t suggest an impending apocalyptic scenario, it does add credence to the theory markets are not entering a sustained rally but reacting haphazardly to day-to-day events.
Meanwhile, yesterday the Dow Jones Industrial Average fell 0.4%, while the Nasdaq Composite added 0.5%, bringing it to its highest close since August as well.
Economic data to watch this week will be the personal consumption expenditures index, due on Friday. It’s the Fed’s preferred measure of inflation because the PCE tracks how consumers are spending their money, and not just the degree of change in consumer prices.
Past PCE reports didn’t move markets much, but the latest might. As UBS notes, markets aren’t pricing in adverse conditions — and that would include a long pause, or even a hike, on interest rates this year. But if the PCE shows inflation is still high, the Fed is likely to take action along those lines, which would thwart markets’ hopes for a rate cut. Stock would fall. It’s not quite Armageddon, but it’d be wise to brace for inflation — and rates — to stay high.
