Benign US inflation could support stock market laggards
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[June 13, 2024] By
Saqib Iqbal Ahmed and Lewis Krauskopf
NEW YORK (Reuters) - Signs of falling U.S. inflation on Wednesday and
growing hopes for interest rate cuts from the Federal Reserve could be a
positive signal for large swathes of the stock market that have
languished in a rally led by Big Tech.
Benign consumer price data fueled bets the Fed will lower rates in
coming months and sent the S&P 500 to fresh highs. Stocks held onto
gains after the Federal Reserve left interest rates unchanged and Fed
Chairman Jerome Powell delivered an encouraging assessment of the
economy.
Some investors believe expectations of cooling inflation and looser
monetary policy could boost areas of the market that have been hurt by
higher rates, including shares of small caps and financial companies.
That could ease worries about the risks of a market rally that has been
concentrated in a cluster of giant tech stocks.
Though the S&P 500 is up about 14% this year, about 60% of the return
has been driven by six companies whose shares have an outsized weighting
in the index: Nvidia, Microsoft, Apple, Meta Platforms, Alphabet, and
Amazon.com, data from S&P Dow Jones Indices showed.
If Wednesday's CPI report is the start of improved data that raises
chances of rate cuts, "that can bring the whole yield curve lower,
benefiting some of the areas that have been sensitive to the upside in
yields," said Angelo Kourkafas, senior investment strategist at Edward
Jones, including small caps and some economically sensitive stocks such
as financials and industrials.
Short-term interest-rate futures are now pricing in more than a 70%
chance of a rate cut by September, up from only slightly better than a
coin toss earlier in the day.
While technology and growth stocks have powered stock indexes higher in
recent years, interest rate-sensitive areas of the market have often
surged when hopes of easier monetary policy came to the fore.
One such episode came in the final months of last year, when small caps
soared on expectations the Fed was done cutting rates. The small
cap-focused Russell 2000 gained 13.6% in the final quarter of 2023,
compared to an 11.2% gain for the S&P 500.
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Federal Reserve Chair Jerome Powell testifies during a U.S. House
Oversight and Reform Select Subcommittee hearing on coronavirus
crisis, on Capitol Hill in Washington, U.S., June 22, 2021. Graeme
Jennings/Pool via REUTERS/File Photo
"The Fed doesn't even need to cut in July as we expect, it just
needs to be heading towards that rate cut cycle, if you will, and
that should contribute to broadening performance, "Luke Tilley,
Chief Economist at Wilmington Trust.
"Our view is not just that there is room for broadening, but that we
fully expect that," he said.
Some broadening was in evidence on Wednesday. Though shares of
market leaders such as Apple and Nvidia surged, the small-cap
focused Russell 2000 was up around 2.2% against a 1.1% rise in the
S&P 500. The small-cap index was down 0.1% for the year heading into
Wednesday’s report.
Other areas bouncing back on Wednesday included the S&P 500 banks
index, up 0.6%, although it remained in negative territory for the
quarter. The Dow Jones Transportation Average was up 0.9% on the
day, while the S&P 500 real estate sector gained 1.1%; both groups
are still logging declines on the year.
The equal weight S&P 500 - a proxy for the average stock in the
index - was up 0.7%. It has gained just 4.5% this year.
To be sure, investors were sticking with some of this year's winners
too. Technology, the best performing S&P 500 sector this year, was
up 2.9% on the day, including gains of more than 4% each for Nvidia
and Apple.
At the same time, investors are likely to be cautious when it comes
to cutting exposure to tech in favor of other areas of the market.
The tech-heavy Nasdaq 100 has outperformed the Russell 2000 by about
24 percentage points over the last year. Looking back further, the
performance gap is an even wider: 50% over two years and 53% over
five yers, according to LSEG data.
(Reporting by Saqib Iqbal Ahmed and Lewis Krauskopf; Editing by Ira
Iosebashvili and David Gregorio)
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