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Inflating Into The Second Quarter

Wow, what a week. Just when many investors started getting comfortable with a lofty stock market and turning all attention to getting their 1040’s filed, that pesky inflation/CPI report shook the status quo.


At the start of 2024, the general consensus was that the Fed would come to terms with the fact that inflation wasn’t moving as low as they had previously desired. This would create less pressure on continued interest rate hikes and a focus on lowering inflation in other ways. The end result being that this would bring upon interest rate decreases starting in June. Well, April’s CPI report seems to have reduced odds of that happening with 12-month inflation coming in at 3.5% vs an expected 3.2%. This resulted in the S&P 500 ending the week almost a couple percent down and others a bit lower. A once rosy outlook turned into one of uncertainty for the next six months.


It is often said that ‘bull markets don’t die; the Fed kills them.’ In this case, it’s the anticipation of what the Fed might do that is the catalyst. Will the Fed hike rates again? Will mortgage rates be pushed toward 10%? It is anyone’s guess. That said, a couple days of volatility doesn’t spell the end of a bull market. But it leaves many wondering where we go from here.


The charts below show an interesting trend. The significant flows INTO Investment Grade bonds and money market funds during 2023 and into 2024 stick out. This behavior could spell a couple of things:  1. The anticipation of a Fed Rate decline can set up a nice entry point for bonds (when rates decline, bond values tend to rise), thereby causing some to consider this a timely opportunity for fixed income investments.  2. Cash is still paying 4-5% and there is still a lot of it on the sidelines. Enough volatility has the potential to bring some of this cash off the sidelines and into markets. Time will tell. But, like we have seen for many years now, there is plenty of dry powder on the sidelines ready to be deployed if the market flashes the proverbial ‘on sale’ sign.

An interesting topic of discussion relates to the fact that the number of public companies in the United States has decreased over the last 20 years. In 2000 we had close to 7,000 publicly owned companies. In 2024, we have roughly 4,000 (about the same as 2010.) We also have more cash floating around in the hands of consumers and more investors using said cash to invest. One argument could be made that there is too much money chasing too little goods. Goods being stocks. When it comes to the stock market and investing in companies that drive our economy, is this excess a bad thing?


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