Most major equity indices staged an impressive comeback in the last week. Each of the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average indexes surged by more than 6% in the week ended on May 27.
Sam Stovall, the chief investment strategist at CFRA Research claimed it might be the beginning of a long-awaited relief rally. The upcoming week is a four-day one where companies such as Hewlett Packard Enterprise (NYSE: HPE), Chewy (NYSE: CHWY), and Salesforce.com (NYSE: CRM) will report quarterly results.
There are several macro-economic catalysts for stocks in the next few days that include ISM manufacturing data, monthly vehicle sales, and job openings data, all of which will be released on Wednesday.
According to economists, the pace of job creation might slow in May to 325,000 compared to 428,000 jobs added in April.
The equity market remained choppy in recent trading sessions but gained momentum after the Fed released details from its last meeting. Stovall explained, “It was waiting for some sort of a catalyst, and I think it got it from the Fed. Not only was it not more hawkish, but it said it would look to expedite the rate tightening.
He added, “So I think a lot of investors thought they were frontloading the rate hiking cycle, implying they could end up pausing in the third quarter sometime. I think that’s what was the rally trigger. The market just got oversold on a breadth and sentiment perspective and was ripe for some sort of good news and the Fed delivered.”
Market participants expect the Fed to increase interest rates by 50 basis points in the next two meetings. But once the central bank reverses to interest rate hikes of 0.25%, the indices should rally even further.
Will S&P 500 investors buy the dip?
The preferred inflation indicator of the Federal Reserve also known as the core personal consumption expenditure price index rose 4.9% year over year in April. While still elevated, the PCE data suggest that price pressure might ease a bit. The PCE data for April was in line with estimates and slowed from the 5.2% increase in March.
Basically, the PCE data does not include food and energy prices which are volatile and a major contributor to inflation. If we include, food and energy prices, the PCE would have surged by 6.3% in April compared to 6.6% in March.
Despite high inflation rates, consumer spending continues to increase on the back of higher wages and lower savings rates. Data from the BEA suggests personal income rose 0.4% in April, which is a decline of 0.1% percentage points compared to March.
Several hedge funds have offloaded investments in the first five months of 2022. There are several stocks trading at a discount making them attractive to value, contrarian, and growth investors. So, beaten-down stocks trading at a discount are well-positioned to gain momentum if institutional investors buy the dip.
Bond yields in the past week were lower and the 10-year yield on Friday stood at 2.74%. Data suggests that fixed income instruments are attracting funds which should keep yields constrained going forward. These developments should be viewed as a positive catalyst for growth companies that were impacted significantly as interest rates moved higher.