The Fed, Earnings, and Labor Keep Market Optimism Afloat
The Fed:
In case you missed it, the Fed threaded the needle on Wednesday this week and didn't disrupt the market too much. On the surface, it looked like they didn't cut rates, but if you know what to look for in Fed announcements, you will find that they actually made an adjustment that should ease some pressure on the market.
The headlines from the Fed report aren't great. As the Fed put it, "In recent months, there has been a lack of further progress toward the Committee's 2% inflation objective", which should lower expectations for a rate cut in the short term. The timing of a cut isn't likely "until it (the Fed) has gained greater confidence that inflation is moving sustainably toward 2%".
On the surface, that all sounds bad for the market and lower rates. However, there are two factors to consider as we plan ahead.
Investors have already adjusted their view on interest rate cuts. The bond market isn't pricing in a cut until September, a significant adjustment compared to just a few months ago. The Fed met expectations by not adding any new language in that respect.
The Fed is reducing the rate at which it sells Treasury bonds by more than half. The Fed has been selling $60 billion in Treasury bonds monthly to reduce its stockpile acquired during quantitative easing. That selling program has increased the supply of those bonds in the market.
If you increase the supply of something, its price decreases (if everything else remains the same). Because bond prices are the inverse function of interest rates, long-term rates rise when bonds decline. So, if the Fed slows the rate at which it is selling bonds, it will reduce the cost of long-term capital. This change didn't get a lot of coverage in the press but it is a big shift for the Fed.
The following chart shows the effect the Fed's change in its bond-selling program had on the 10-year treasury yield. The 10-year yield is an excellent proxy for the cost of borrowing for businesses and consumers. It's not a huge move, but anything that strengthens resistance in the interest rate market or brings rates down will positively impact the stock market.
Earnings:
In addition to the Fed's actions being a little more supportive of stock prices, earnings have also continued to show fundamental strength. According to Zacks, among the 300+ members of the S&P 500 that have reported so far, earnings are up 5%, and revenues are 4.5% higher than last year. The tech sector has been responsible for a large percentage of those gains, but it's not exclusively tech, which is a good sign.
For example, Apple Inc. (AAPL) reported after the market closed on Thursday. Although the numbers from China are down, the iPhone maker beat expectations by a comfortable margin, which should continue pushing the tech sector higher. Outside of a confusingly bad report from Meta Platforms Inc. (META) (AKA Facebook), there just isn't much bad news this quarter to depress sentiment.
Employment:
The monthly labor report was released this morning showing the U.S. economy added 175,000 new jobs. That is a little lower than expectations, but it may have hit a sweet spot for investors by being positive but not so much that inflation fears resurface. As we have said in past updates, as long as hiring and spending trends are positive, we expect support on the major stock indexes to hold.
The bottom line is that the underlying fundamentals are positive, but there is still likely to be enough volatility in the second quarter to approach the market conservatively. As we mentioned two weeks ago, that means we may want to stand back from the market on bad days or weeks and then push in with more trades when the situation looks better.
In the video below, we explain why volatility is likely to remain high and how a bullish but choppy market can still favor the Predictive Alpha Prime portfolio. (15:16 min. watch)
Each week, we will update you on our open trades, organized by their initial "target price" date.
To be clear, these trades are straight stock buys; we will not pursue any options trades in this service.
Predictive Alpha's unique A.I. system allows it to predict, with astonishing accuracy, where a security will move over the next month (or, to be more specific, the next 21 trading days).
Because this A.I. is so sensitive and updates its predictions every single day, a predicted target price may change from one day to the next.
We watch those changes carefully and will alert you when we think an exit is optimal.
Target Price/Date: $161.20 by May 31, 2024 (we set a GTC limit order to sell the stock at its target price on May 2, 2024)
Current Return: 1.01%
The current outlook for retail spending remains positive. If interest rates are cooling a little, that should send TGT higher before earnings later this month.
Target Price/Date: $91.91 by May 23, 2024 (we set a GTC limit order to sell the stock at its target price on May 2, 2024)
Exit Price/Date: $91.91 on May 3, 2024
Trex rose through our recommended limit price as investors reacted to a solid report from Apple Inc. (AAPL) on Friday morning. We closed the trade early right on target at $91.91. That's a 2.67% gain in just eight days!
John Jagerson & Wade Hansen Analysts, Predictive Alpha Prime
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TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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