Cooling inflation data bolsters market bulls, but the durability of this rally is uncertain

It’s a breath of fresh air and a boost to psychology, but will it last? The S & P 500 has climbed 6.5% since last week’s intraday bottom. Stocks are rallying because: 1) interest rates are going down, and 2) fed fund futures are showing a “pause” in the fall. The bulls are trying to construct a narrative that demonstrates that: 1) inflation is peaking, and 2) the “growth scare” scenario may not be as dire because while the low-end consumer is having trouble with inflation, the higher-end consumer is not hurt nearly as much ( Nordstrom , Williams-Sonoma , Movado ). The problem with the narrative is that it is way too early to buy into a big rally based on a Federal Reserve “pause” that is six months away and based on a theory (peak inflation) that has not been demonstrated. The core personal consumption expenditures price index data is supportive of the “peak inflation” narrative. On Friday morning, April’s core PCE, a measure of inflation, came in at 4.9%, well below the 5.3% peak in February (and 5.2% in March). Still, even if the PCE data is supportive of the bull position, don’t expect the Fed to change their tone. They have made it clear they need far more data that inflation is cooling before they will back off. Is this another one of those sharp, short rallies that die on the vine, or the start of a sustained rally? Momentum: less Tesla and Nvidia, more Lilly, Costco and Conoco. The iShares MSCI USA Momentum Factor ETF is a basket of stocks that show strong price momentum. It’s rebalanced twice a year — in November and May. Momentum fans like to watch the fund for signs of what’s in and what’s out. The rebalancing occurred at the close yesterday. The results clearly reflect the rise of energy stocks ( ConocoPhillips ) and the relative stability of big pharma ( Eli Lilly and Co. ), while Tesla and Nvidia both dropped down. iShares MSCI Momentum ETF (MTUM) ( top holdings ) Eli Lilly 4.3% Microsoft 3.2% Costco 3.0% Tesla 2.7% JPMorgan 2.6% ConocoPhillips 2.5% Prior top holdings Tesla 5.5% Microsoft 5.1% Nvidia 4.9% Eli Lilly 3.8% JPMorgan 3.7% Costco 3.5%