The S&P 500 had a slight decline of 0.3% on Tuesday but remains close to its record high achieved on Friday. Despite this setback, the index has performed well this year, with a 26.5% increase year-to-date and a 4.4% rise since Election Day. Investors are closely watching market trends, including insights from IBD's "The Big Picture" column, to inform their trading decisions.
Recent Consumer Price Index (CPI) data showed that core inflation remains high, with the overall CPI rising by 0.3% in November, resulting in a 2.7% 12-month headline inflation rate. The core CPI also increased by 0.3% for the fourth consecutive month, leading to a 3.3% 12-month core inflation rate. The market reacted positively to the CPI release, with traders pricing in a high probability of a Federal Reserve rate cut in the upcoming week.
Following the CPI report, the S&P 500 saw an increase, indicating investor optimism despite persistent inflationary pressures. Analysts suggest that while the data suggests a potential rate cut, the Federal Reserve may take a more cautious approach to future cuts, particularly in 2025. The combination of high inflation and a strong stock market could result in fewer rate cuts than previously expected.
Prices for core goods unexpectedly rose, driven by an increase in new car prices and used car prices. Apparel prices also saw a modest rise. Economists believe the spike in vehicle prices may be temporary and linked to demand fluctuations caused by recent hurricane damage.
Food prices, which are not included in core CPI calculations, increased, indicating ongoing inflationary pressures in the food sector. The Federal Reserve's primary concern remains the services sector, where core services prices have risen for two consecutive months, suggesting a more stable inflation environment in that area.
The likelihood of a third consecutive Federal Reserve rate cut at the upcoming meeting has increased to 98%. After this expected cut, the Fed is expected to adopt a more cautious stance and pause further reductions. Market pricing indicates a projected federal funds rate of 3.73% by the end of 2025, suggesting a slightly higher probability of three quarter-point rate cuts next year compared to two.
Seema Shah, Chief Global Strategist at Principal Asset Management, commented on the CPI report, noting that it likely confirms a Fed policy cut next week. Shah highlighted the moderation in owner equivalent rent inflation as a positive sign but emphasized the Fed's vigilance regarding potential inflationary risks, especially in light of President-Elect Trump's economic policies.
As the market digests these developments, the S&P 500 advanced in Wednesday's trading session, gaining momentum after the CPI report. Investors are closely monitoring the upcoming Producer Price Index (PPI) data, set to be released on Thursday, which will provide further insights into inflation trends and their potential impact on monetary policy. The PPI components, including healthcare services prices and airline fares, are critical as they feed into the core Personal Consumption Expenditures (PCE) price index, a key measure for the Federal Reserve. Overall, the interplay between inflation data and stock market performance continues to shape investor sentiment and expectations regarding future monetary policy.