U.S. stocks closed lower on Friday, 12th May 2023, after lower-than-expected consumer sentiment and rising inflation.
The University of Michigan consumer sentiment index fell to a six-month lowe
r in May, while the five-year inflation outlook jumped to its highest reading in more than a decade.
Financial stocks were weaker as concerns over regional banks continued. The debt ceiling crisis was also cited as one of the reasons why we did not end the week higher. The Republicans’ determination to utilize it as a means to enforce spending cuts has raised doubts about whether the increase in the debt ceiling will pass before the deadline.
For the week, the leading stock market averages turned in a mixed performance. The Nasdaq increased by 0.4%, while the S&P 500 and the Dow Jones both ended down by 0.3%.
Here are the closing levels on Friday, 12th May 2023:
“A slight setback to the bullish environment” is how I would describe last week’s trading.
Once again there is a lot of evidence that the inflation story is not yet over.
Granted, inflation has been trending lower recently but is it lowe
r enough for the Fed to reverse the hikes with rate cuts?
As it stands now, the market is pricing in 3 rate cuts again by year-end. The CME Fed watch tool is predicting a 44.1% possibility that the Fed Funds rate will be in the 4.25-4.50 range.
With that in mind, you can’t blame investors from keeping a positive view on share prices.
So regardless of the Fed’s stance on higher for longer, this market is going to keep holding on to longs.
However, the debt ceiling crisis may bring in some downside risk to markets. Even if we believe that it will be resolved before any serious damage can be done, there is still a risk that some damage may be felt.
With VIX at such lower levels, buying put options has been a good strategy to hedge downside risk, as evidenced by the increased purchase of such options in recent months.
This has raised concerns among investors about the potential for a major market pullback.
Many, myself included, believe that the market’s expectation of rate cuts is incorrect and that the Fed will remain committed to combating inflation, even if there is some relief in the inflation rate. Until the market’s pricing of rate cuts changes, the bullish outlook will remain unchanged.
Source: CBOE, Bloomberg, CME Group
This commentary is written by James Gomes.
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.
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