The Stubborn Bulls Defy The Naysayers

John Adams, second president of the United States and a Founding Father, said: “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.”

Here’s a stubborn fact that today’s financial naysayers either can’t fathom or refuse to acknowledge: the economy and financial markets are actually doing well.

The economic recovery continues in the U.S. and most countries around the world. Growth has decelerated but a recession doesn’t seem to be in the cards. What’s more, the S&P 500 has nearly reached record highs once again after rebounding from a 5% dip in April. This uptick has been fueled by decreased concerns surrounding rising interest rates.

However, certain pundits with an axe to grind are intent on talking down the economy and stock market. Their agenda is to spread gloom. Don’t fall for it.

The primary focus of attention this week is centered around inflation, notably with April’s consumer price index (CPI) report scheduled for release on Wednesday. Market consensus anticipates a 0.3% month-over-month rise in core CPI, following a series of higher-than-expected 0.4% monthly increases earlier this year.

A slowdown in the inflation rate is necessary to validate the recent stock rally and the decline in yields seen thus far in May. Of particular interest are services and shelter prices, where moderation has been notably sluggish and is vital for a broader decline in consumer prices over the coming months.

Sustained indications of disinflation in the near future would strengthen the argument for an initial rate cut by the Federal Reserve before year-end. Regardless of the precise timing, Wall Street is confident that the Fed’s next policy adjustment will be a reduction, which would broadly benefit the economy and financial markets.

Following the Federal Open Market Committee (FOMC) meeting this month, during which Fed Chair Jerome Powell indicated that the next policy adjustment is unlikely to be a hike, the bond market is now predicting two rate cuts for the year ahead. These expectations are reasonable, given the Fed’s inclination towards rate reductions.

Accordingly, bond yields have retreated lately, as evidenced by the dip in the benchmark 30-year U.S. Treasury yield (see chart).

In addition to the consumer price data, forthcoming reports will provide fresh insights into consumer sentiment. Despite persistent inflation in recent months and a softer first-quarter U.S. gross domestic product (GDP) figure, talks of potential stagflation (characterized by weak economic growth alongside high inflation) should be considered premature at this juncture.

While economic activity is expected to moderate from last year’s robust pace, consumer spending (a significant component of GDP) is likely to remain resilient due to historically low unemployment and ongoing wage growth.

The latest data on April retail sales, coupled with earnings reports from major retailers, will provide valuable information on household spending patterns, further shaping the economic outlook.

Reports from consumer-centric companies in recent weeks have hinted at consumer fatigue. Analysts anticipate a gradual slowdown in household spending as the year progresses, but this slowdown is expected to manifest as slightly reduced growth rather than a dramatic decline in spending.

Combined with signs of recovery in sectors such as manufacturing and capital investment, positive economic growth is likely to be sustained throughout the year. That’s a stubborn fact.

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John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.