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Stock Market Risks: Stubborn Inflation and Fed Meeting

Despite stock markets digesting the weak quarterly GDP and persistent core PCE inflation on Thursday, the major indices rebounded. This may prove short-lived. The persistent inflation prevents the Federal Reserve from cutting interest rates anytime soon. It would need to re-assess its monetary policy and its impact on the economy over several quarters.

In response to higher interest rates for longer at over 5.0%, stock markets are not ready to panic. Instead, they are buying strong companies and dumping weak ones. After posting strong quarterly results, investors are accumulating more shares of Microsoft (MSFT) and Alphabet (GOOG). They are selling disappointing firms like Intel (INTC) and Meta Platforms (META).

Fed Meeting

On April 30 – May 1, 2024, the FOMC will meet. Expect Fed Chair Powell to repeat the importance of inflation and job data guiding the FOMC’s decisions. At best, the Fed Chair will not hint at cutting interest rates sometime this year. Instead, the bank will say that interest rates do not need to change until inflation is undeniably on a downward trajectory toward 2.0%.

Watch the March Personal Consumption Expenditure (PCE) index today. The higher it is above 2%, the higher bond yields will rise. This hurts widely held ETFs like the S&P 500 (SPY) and the small-cap ETF (IWM).

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