There’s been very volatile price action recently in the stock market, particularly in the S&P 500 and Nasdaq sectors. But as of the time of writing this blog, these indices are in rally mode, and that bull run has been spearheaded by technology companies — one of the sectors that have sent a signal to the market that they’ve got some confidence to buy risk assets on the stock market during the new trading week. Economic calendar events are a driver that helps investors gauge the current mood in the markets, and that event last week was the release of key inflation data. When that CPI data was released to the markets, it came in softer than many investors had hoped for. So the markets took that as a sign that maybe inflation will not force central banks to go forward with their plans to hike rates potentially, which had appeared to have been baked in. But I think the stock market took that number on a more medium-term trade basis, and what the number did was that it took the temperature down on investors who were holding carry trades that saw this number coming in too hot, which was good for global growth. It had also cooled down the markets in terms of trade negotiation talks between the U.S. and China, which has market participants pricing in that these talks will continue to go well (which is risk-on for the stock market).

What to Expect in the Upcoming Earnings Season

Earnings season is upon us – it’s time to take a good look at some broad economic indicators and prepare for potential market-moving catalysts.

• Key earnings. Major companies have unique insights into the economy, and as they report their numbers, they may move the market. Companies may also choose to surprise the market by announcing various booking tactics (i.e., buy/sell orders) and revenue recognition choices.
• Earnings forecast revisions. In addition to management’s guidance and the outlook for the rest of the year, most companies will provide a new earnings outlook that can be particularly useful to help gauge the future wellness of the economy.
• Tariffs. One eye on the calendar for dates is never a bad idea as any announcements made to the market about new tariff scales could potentially move the market.
• Geopolitical. Keep an eye out for global, geopolitical news as it will continue to either heighten or reduce investor fears, market confidence, and the animal spirits’ appetite for risk.

S&P 500 and Nasdaq Reach New Heights

The S&P 500 and Nasdaq are at record highs, as the S&P 500 has now claimed 4,600 points and the Nasdaq 15,000 points—numbers that have turned the heads of the financial community (this startling performance is due to blue-chip businesses making a ton of money).

MSAI (the “S” stands for spending) has completely revived the U.S. business cycle, which had been held up for the last year or so by miserly fiscal conservatives. Several other reasons for the surge in the U.S. indices stand out:

1. Technology continues to proliferate in our society (Artificial intelligence [AI] has come a long way. Wait until you see AI on “renewable natural gas.”)
2. The Federal Reserve’s monetary policy remains extremely accommodating, which, along with surging technology, continues to push financial speculators into equity risk. What number will this trader be looking for over the next few years? I’ll be looking at them all, i.e., the bond markets, the economic indicators, and, of course, a “few” technology companies.

The Role of Tech Stocks in Market Performance

Today’s rising market gains, particularly in the current economic climate, have been thanks in large part to some of the major tech companies: Meta, Alphabet, Nvidia, and Microsoft. These are not only technological leaders, but they also have robust earnings reports, significant new technological developments, and — perhaps most importantly (and also what draws the greatest number of parallels) — they have the financial resources and economic defense necessary to perpetuate the development of, for example, AI systems during times of economic uncertainty, thus making them safe economic bets (and excellent places to invest), especially during times of economic uncertainty.

In today’s “manic” economy, where does one place their money? Well, meta, alphabet, NVIDIA, and Microsoft are certainly not bad options. While this list is short, it is by no means insignificant: AI, cloud compute, and digital transformation are a part of everyday life (and will become increasingly so), while simultaneously pushing the existing market to both higher prices and higher levels of financial volatility.

Understanding the Impact of Inflation Data

The just-reported Personal Consumption Expenditures (PCE) inflation reading tells the story of still-hot inflation that is not cooling as expected, and the situation is prompting Federal Reserve officials to rethink their game plan.

The policy implication of hotter-than-expected inflation is simple: If inflation won’t go away, there is no way the Fed could continue cutting its trendsetting short-term Federal Funds interest rate. Recent anecdotal accounts suggest that U.S. consumers are not confident in their ability to purchase the things they want or need to buy. If the consumer price line on the box of frozen “thin mints” girl scout cookies that you find at your local Wal-Mart store won’t go down, forget about the possibility (i.e., the probability goes to zero) of the Fed dropping its trendsetting Federal Funds interest rate down a notch.

Trade Optimism and Its Effects on Market Sentiment

Many sectors (notably technology and manufacturing) stand to recover in a big way with favorable US-China—driven trade flows. Revenue/rebound cases can be made for all types of tech and machinery, etc., as investors continue to look, like, bake in recovery outcomes during 2020. Consider making, as an output, any bullish move you, as an investor, want to take in the market against the backbone of this piece: reduced global trade!

Every day the major world indices don’t make a bullish move adds to the bear “volatility to come” pile of mental notes permeating the market trade. US business trade prohibitions are a major obstacle to efficient global markets. Further, any list of macro themes standing in the way of macroeconomic earnings/stability has to have, to any economic analyst or investor, US trade at the very top.

This article will bridge the gap between tech stocks, the movements in the overall market, inflation data, and trade optimism. As we navigate down this rabbit hole, it will become clearer as to how inflation data and trade discussions impact stock prices, particularly with tech.

Upside trade developments will give cause for investors to project additional growth in the economy. Technology is the growth sector of the economy, so it could spark a big rally in the shares of technology companies. This is good information to be aware of. The markets can trade according to the understanding of this phenomenon. This [[thinking ahead]] is the real definition of being a great investor. The thought that goes along with strategic thinking like this can be done as reported updates on the stock market are followed. While you are following the stock market, statistically, you need to put yourself in the position of someone who comprehends the benefits of these findings.

The Core Personal Consumption Expenditures (PCE) index recently rose to 2.7%. This one metric has huge implications for financial markets.

The increase seems to be due to inflation, which means the Federal Reserve will have to think twice about lowering interest rates (something many pundits had been expecting). In turn, people who play the markets have to rethink their strategies. This will create some interesting dynamics across a variety of trading instruments:

Forex: A higher PCE number may help drive up the value of the U.S. dollar. The reason is that if inflation is driving up PCE, then this could be seen as a move toward a change in stance by the U.S. Federal Reserve Bank, and thus a tightening of monetary policy.

Commodities: Similarly, any significant Fed tightening could put commodities under pressure. If the cost of borrowing increases, as we expect it might if interest rates rise, this could suppress demand.

Equities: In the stock markets, sectors known to be highly correlated to interest rates (notably financials along with utilities and real estate) will have to readjust their investment strategy. There will likely be some measure of increased sector rotation, so keep an eye on both the fundamental and technical analysis. (We'll see that the technicals might help us get an early perspective on FA and, in particular, regression away from the current mean.)

Bonds and ETFs: Here, once again, I expect some pressure. This might lead to a more proportional increase in equities and draw investment away from ETFs, but again, we need to look at the bigger picture, so let’s run a funnel analysis.

Analyzing the Data: Technical vs. Fundamental Analysis

Technical analysis of the Personal Consumption Expenditures (PCE) data involves examining price trends and patterns in financial markets. Analysts utilize charts and indicators to identify potential future movements based on historical price behavior. This approach can help traders make informed decisions about entry and exit points, capitalizing on short-term fluctuations that may arise from changes in consumer spending and inflation expectations.

On the other hand, fundamental analysis delves into the broader economic implications of PCE data. It assesses how consumer spending influences overall economic growth, inflation rates, and monetary policy decisions. By understanding these relationships, investors can gauge the health of the economy and anticipate central bank actions, such as interest rate adjustments. Together, these analyses provide a comprehensive view of market dynamics, enabling informed investment strategies.

Understanding Core PCE and Its Significance

The Core Personal Consumption Expenditures (PCE) tool measures what people spend on everything. It is the way the Federal Reserve gauges inflation for its zero-interest-rate target. They strip out food and energy (like oil/gas for your car) to offset short-term fluctuations.

t-term fluctuations to the number and to give what they consider a better "long-term" fiscal inflation policy view. It provides a reference point for whether or not average citizens "think" and "act" as though the businesses around the country are raising and/or lowering their prices. Also, the fact that the US economy is currently at 2.7% (May of 2021) is well above the Fed's target of "around 2%" and is (finally) consistent with something other than flat or no demand curve. The inflation argument is "far from over."

The Federal Reserve's Response

The Core Personal Consumption Expenditures (PCE) index, which excludes more volatile food and energy prices, is the Fed's preferred measure of inflation. A rise in Core PCE suggests underlying or "core" inflation is picking up and can elevate concerns about the economy overheating. This would put the Fed on red alert and could prompt a shift in its policy narrative—where rates are probably low enough for now and should be left there so as not to "stoke the flames" further.

The narrative of "stoking the flames" would, in turn, cause lingering rate hike hopes to evaporate. In simple terms, the Fed is tasked with managing inflation (a gauge of price growth or price "stability") and economic growth. A sharp and sustained rise in Core PCE inflation would make it harder for the Fed to "kill two birds with one stone." In other words, higher or low rates may be necessary at one time to combat higher inflation (which the “pull the brakes, growth is overheating” crowd wants), but not necessarily at another, even short-term, time or juncture (where it could cause slower economic growth).

Future Outlook: What Lies Ahead?

With the possibility of differing inflation rates, many are forming their predictions about what scenarios could do to the global economy. High inflation rates often eat away at the purchasing power of the public, leading some to think that many of the larger central banks will be forced to adopt a lower interest rate in order to improve economic strength. The debate is currently on the scale and the when; analysts are still not in agreement over either point.

While this is going on, investors need to have a financial strategy in place. They need to be prepared for an environment with high inflation by having a diverse range of investments, many of them with proven records of high performance through times of inflation. Historically, real estate and some natural resources have turned out to be winners. Doing your own unique take on basic hedging will put more money in your pocket in the long run and will present you with more wealth-looking opportunities in the future

"The higher expectations for Core Personal Consumption Expenditures (PCE) are significant. Now at 2.7%, Consumer PCE is one of the primary measures of inflation that the Federal Reserve watches. So, if the average price of goods and services purchased by consumers is rising, pressure will now be on the Fed to pivot on th

The current interest rate policies. Inflation can usually mean the anticipation of tightening in some type of monetary policy as the Fed looks to stabilize prices.

For folks with investments, your ears should be tingling. Making a note of this could be critical. Even perception that the Feds could raise these rates or tighten on QE will be felt across asset classes, punching like hands of stone trying helplessly to block a future onslaught of rising rates (at some point). The timeline of this railway must be determined! Observing those with qualifications to do so will be necessary and essential (again)—and sooner rather than later. Refreshing how the banking and financial industry has managed other transitions underway will take considerable attention in an environment that continues to change.