The Consumer Will Determine What the Market Does Next
For most of the last 17 months, the main driver of the stock market has been the Magnificent Seven stocks and the AI theme. Despite a rebound in inflation and constant pushback in interest rate cuts, the indexes chugged steadily higher on the backs of a small group of big-cap technology names. These stocks were posting great earnings and were largely immune to higher interest rates and inflation.
That has started to change in the last couple of months. The Magnificent Seven names are holding up, but they are no longer the leaders they once were. Other stocks have been performing better, and even the much maligned small-caps have been showing better relative strength.
Market participants haven’t worried much about the Fed or the economy. They have been content to believe that the Fed is done with rate hikes, the economy would stay strong, and rate cuts were just a matter of time. The fact that cuts were pushed back has not been a major market negative so far.
On Friday, the marker reacted poorly to the Michigan Consumer Sentiment Report. This report was surprisingly weak. Consumers are becoming more worried about the economy, and their expectations about inflation are also increasing. To put it in harsh terms, the concern about stagflation is out there.
This week, the market has a number of news events that will throw further light on the mood of retailers. PPI will be reported on Tuesday morning, and the very important CPI and retail sales will be reported on Wednesday. In addition, earnings from Walmart (WMT) and Home Depot (HD) will provide more insight into the health of the consumer.
In addition to the data, there will continue to be a parade of Fed speakers. There have been quite a few of them lately, but the market has not reacted very much to their comments because they all need more economic data before they know whether there will be rate cuts in 2024 or not.
Technically, the indexes have had a very good bounce and cut through some resistance levels very nicely. Small-caps are exhibiting excellent relative strength, but the action turned down on Friday after the Sentiment Report, and there are obviously some concerns about upcoming economic data.
At the time of publication, James "Rev Shark" DePorre had no position in the securities mentioned.