Will PCE Inflation News Slow the Mighty Market Uptrend?
The most interesting market development in August has been the relative strength in small-cap stocks.
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After hitting new all-time highs on Thursday, the S&P 500 is indicated lower as investors await PCE inflation news on the last trading day of August. Despite concerns about negative seasonality, August has been another upbeat month for stocks with a steady rise primarily due to optimism about a dovish Fed.
The most interesting market development in August has been the relative strength of the Russell 2000 small-cap index. It has outperformed all other major indexes and has benefited greatly as investors rotate into more speculative stocks that aren’t as extended as some of the mega-cap technology names.
While the Magnificent Seven and AI-related stocks have continued to perform well, they are not dominating the indexes like they did earlier in the year. The Mag 7 ETF MAGS has increased 3.5% in August, while the Russell 2000 ETF IWM has more than doubled that return with a gain of 7.7%.
Despite this outperformance, bears continue to focus on the valuation of the mega-cap technology names and ignore the fact that much of the rest of the market is very healthy both technically and fundamentally.
With earnings season over and the start of September, which is historically the weakest month of the year, the focus will turn to economic matters. The market is currently anticipating an 85% chance of a quarter-point rate cut on September 17. In addition, Fed member Christopher Waller said on Thursday, “let’s get on with it’ in reference to a quarter-point cut. Waller is concerned that economic conditions could deteriorate further and quite rapidly.
PCE economic data is expected to show that core inflation is running at 2.9%, which is the hottest pace in five months. That is a concern of the economic bears, but in his speech at Jackson Hole a week ago, Fed Chair Jerome Powell indicated greater concerns about economic slowing, which will offset upticks in inflation.
The primary question for investors is whether the indexes can continue to trend as we await the Fed decision on September 17 and also deal with poor seasonality. There have been a few signs of technical problems recently, and there is likely to be some strong support, but if there is corrective action, it is likely to be rotational.
Don’t expect a sudden collapse in the indexes and a broad-based selloff. Correction action is much more likely to occur by sectors and themes, and leave opportunities for stock pickers that are focused on good charts.
We have a little nervousness in front of inflation data on Friday morning, and there may be some inclination toward profit-taking in front of the three-day holiday weekend.
At the time of publication, Rev Shark had no positions in any securities mentioned.
