By Christine Idzelis
‘This is an extraordinary time to take risk in the U.S.,’ says J.P. Morgan Asset Management’s Phil Camporeale
The U.S. stock market is facing an inflation reading that will test its 2024 bull run and offer clues as to whether the economy remains on course for an anticipated soft landing.
Many investors expect the Federal Reserve will start cutting interest rates in 2024 as it seems to be winning the battle with inflation even as the unemployment rate remains low. On Tuesday all eyes will be on the February inflation report from the consumer-price index, with traders seeking to discern how soon potential Fed rate cuts may arrive.
“They don’t need inflation to be at 2% to ease,” said Phil Camporeale, a portfolio manager for J.P. Morgan Asset Management’s global allocation strategy, in a phone interview. “They just need inflation not to get any worse.”
Inflation has fallen substantially from its 2022 peak of slightly more than 9%, but it hasn’t reached the Fed’s 2% goal. Also, January inflation data from the consumer-price index came in hotter than expected, sparking a sharp drop in U.S. stocks on the day the report was released.
But in Camporeale’s view of markets, “this is an extraordinary time to take risk in the U.S.”
Based on the U.S. employment report released on Friday, “the Fed is still on pace to start cutting rates this year without a recession,” said Camporeale. “That’s really good for stocks.”
Friday’s employment report showed jobs creation in February was stronger than expected, but that wage growth cooled and payroll gains from the previous two months were revised lower.
Slower wage growth and “a moderation” in jobs gains helps relieve inflationary pressures, said Camporeale. And although the U.S. unemployment rate rose to 3.9%, he said it’s been running below 4% for more than two years in the longest such stretch since the 1960s.
The economy has been “resilient,” but it’s not accelerating in a way that raises the risk of inflation flaring up, according to Camporeale.
The central bank has been holding its benchmark rate steady at the current target range of 5.25% to 5.5% – the highest level in 22 years – since July in an effort to lower inflation sustainably toward its 2% target.
If February’s inflation reading falls “outside of a narrow band of expectations,” that risks moving “the needle more quickly” in the stock market, said Liz Ann Sonders, chief investment strategist at Charles Schwab, in a phone interview.
Meanwhile, U.S. stocks have “a little more nuanced” relationship with the bond market this year, with the rise and fall of Treasury yields influencing market breadth rather than simply sending the broad equities market up or down, she said. When yields move up, breadth may worsen; and when yields move down, breadth may improve, according to Sonders.
Read: S&P 500’s breadth ‘still narrow’ after record peak – with these four stocks driving February gains
The yield on the 10-year Treasury note BX:TMUBMUSD10Y finished Friday at 4.088%, the lowest rate since Feb. 2 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data. Still, the 10-year yield was up almost 23 basis points so far this year.
Camporeale told MarketWatch last year that rising Treasury yields in September were part of “a kiss-your-recession-goodbye trade,” although their climb created anxiety for stock-market investors who were still jittery after being wounded from a surge in yields in 2022 as the Fed fought soaring inflation with rate hikes.
In 2023 recession fears being pushed further out, this year that has happened with interest rate cut expectations, said Camporeale.
Traders in the federal-funds futures market are now expecting the Fed may begin cutting rates in June, according to the CME FedWatch Tool at last check on Friday. That’s when Camporeale said that he is anticipating a potential rate cut by the Fed, “absent a material upside shock” in the inflation report on Tuesday.
The U.S. stock market ended lower Friday, with the Dow Jones Industrial Average DJIA, S&P 500 SPX and technology-heavy Nasdaq Composite COMP all booking weekly declines.
Still, the S&P 500 ended Friday up more than 7% for the year and less than 1% off its record close of 5,157.36 on March 7, according to Dow Jones Market Data.
J.P. Morgan Asset Management’s Camporeale said that he’s been overweight equities this year, with a preference for U.S. large-cap stocks over small-caps in the current market environment.
While he expects this year’s rally will “broaden out,” Camporeale said he’s not positioned for a “goldilocks” scenario where the Fed cuts rates four to five times this because inflation is falling to 2% by the end of 2024.
Rather, under his definition of a soft landing, the U.S. economy will avoid a recession with gross domestic product expanding 2% at “right around trend” while inflation falls “not quite” all the way back to 2% by year-end.
Camporeale expects the Fed will be gradually lowering rates this year and that inflation won’t accelerate under the soft landing he sees playing out.
The consumer-price-index report for February “should alleviate concerns that inflation is reaccelerating after the January data,” said U.S. economists at BofA Global Research in a note dated March 7. “We expect a deceleration in core inflation.”
-Christine Idzelis
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03-10-24 1201ET
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