Markets rebounded this week as news of a ceasefire with Iran prompted a relief rally. Meanwhile, leading indicators showed that price pressures are increasing and the Fed’s Battle is heating back up.
MACROECONOMIC UPDATE
- The Institute for Supply Management (ISM) Services report showed slowing growth (>50%) in the service sector as the Purchasing Managers Index (PMI) dropped from 56.1% to 54.0%. The Prices Index rose significantly, jumping from 63.0 to 70.7 warning of rapidly increasing price pressures (see Market Insight).
- The Consumer Price Index (CPI) rose significantly in March with the overall rate rocketing up from 2.4% year-over-year to 3.3% as rapidly rising oil and gas prices hit consumers. This was the largest one month increase in overall CPI since the inflation spike in 2022. Meanwhile, the Core rate, which excludes the volatile food and energy components, rose from 2.5% to 2.6%, indicating that inflationary pressures are not confined to the energy sector and further price increases could lie ahead.
- The Personal Consumption Expenditures (PCE) Price Index for February was released in a delayed report this week. While this data is lagging, it continues to be important as the Core PCE Price Index is the Fed’s preferred measure of inflation. The Overall rate was steady at 2.8% while the Core rate ticked down from 3.1% to 3.0%, well above the Fed’s 2% target.
- In today’s report, Consumer Sentiment plummeted in the preliminary reading for April, dropping from 53.3 to 47.6 (see Market Insight). The Overall Index and Current Conditions Index fell to the lowest levels on record, while the Future Expectations Index has only been lower in late 1979 and early 1980, just before the double dip recession. In addition to record low sentiment, this report also showed inflation expectations for the year ahead increasing to 4.8% from 3.8%. While much of this month’s move is likely due to the Iran conflict, Consumer Sentiment was near historic lows prior to the start of the war, and it will take time for consumers to feel confident in their personal finances again – especially as they grapple with rising prices.
TECHNICAL UPDATE
The ceasefire-induced rally has also caused key technical indicators to bounce, and we are carefully watching this tug-of-war in investor psychology play out.
- InvesTech’s Artificial Intelligence and Gorilla Indexes continued to bounce this week as investors staged a relief rally following the ceasefire in Iran. However, both indicators remain well below their highs of late last year. A fall through their recent lows would likely confirm a bear market, whereas a sustained move upward would indicate that investor speculation is gaining steam once again.
- Bearish Distribution in the InvesTech Negative Leadership Composite (NLC) eased slightly to 30.1. An accelerated decline to -100 would confirm the probability that a bear market is in control. A reemergence of the bullish Selling Vacuum, however, would indicate that the rally may have further to run and some portfolio defenses could be tempered.
INVESTECH MODEL FUND PORTFOLIO
There are no changes to the Model Fund Portfolio this week, which is comprised of 58% long positions, 7% in an inverse index ETF, 5% in an intermediate Treasury ETF, and 30% cash held in short-term Treasurys or a money market fund. This results in 51% net equity exposure.