Weekly Stock Market Update & SPY Technical Analysis
The S&P 500 and the Nasdaq 100 Indexes both reached new milestones last month thanks to the exponential rally that Nvidia and other technology stocks held. Despite headwinds of a slowing economy, lingering inflation, and geopolitical turmoil, investors remained bullish on markets, primarily basing their buying on optimism around artificial intelligence and hopes of an interest rate cut; however most seasoned investors realize that trouble may lurk ahead as we head into election season. High nerves became apparent following the first Presidential Debate, which led markets lower in the second half of last week, despite the improving inflation data reflected on the PCE Index. Politics and financial markets are very intertwined, so the next presidency can bring instrumental change to economic projections based on the party’s beliefs; the focus around the election seemed to eclipse the improving inflation number, which could mean that inflation will no longer be the main catalyst in focus in the coming quarter.
Despite the market’s lack of reaction to the inflation data on Friday, it is still important to understand the change. The Price Consumption Expenditures (PCE) Index reflected a month over month decline in inflation from 2.8% to 2.6%, closer to The Fed’s 2% target, bringing us closer to an interest rate cut. Markets kicked off the year hoping for 3-5 rate cuts this year, but lingering inflation has brought those projections to just one single cut by end of year; however the faster we get to 2%, the higher chances of more rate cuts in the coming 12 months.
Apart from inflation data, last week we saw another GDP revision for Q1, which was slightly better than the last revision, but still lower than the past four quarters. The stalling GDP number is largely caused by falling exports and rising imports, which is alarming for U.S. economic growth, but it also means that high interest rates are finally being felt. The Feds kicked off their interest rate hike cycle about two years ago, specifically stating that high interest rates will slow down economic activity and likely increase unemployment, which is now starting to be felt. The unemployment rate in the U.S. topped 4% for the first time in over two years on the last reading, and is expected to stay above that level once again on this week’s reading. Ironically, both the slowing GDP and the rising unemployment rate are good news for markets, because it means the fight against inflation is likely to be won; however The Fed must be careful to not keep monetary policy tight for too long, or else they risk a full blown recession. There is no exact science to when it is appropriate to cut rates, we’ve seen examples in history where The Fed cut rates too early and inflation kicked back in to spiral out of control, and we’ve also seen examples where monetary policy was kept tight too long and forced U.S. economic growth to plummet. The Fed is walking a tight rope, and their next choice of action can make or break the economy.
P.S.
Note that market will close early on July 3rd and will be fully closed on the 4th in observance of Independence Day.
SPY Technical Analysis:
SPY reached what seemed to be a double top rejection around the all time high mark of 551.12 last week, which is our main resistance in focus for a further breakout. Buyers haven’t been able to successfully breach that level and may need further consolidation before doing so. Current charts reflect more weakness than we’ve seen in the last few weeks, so it wouldn’t come as a surprise to see SPY decline to retest lower supports. Use the levels on the chart above for guidance.