This commentary was originally sent to Growth Seeker subscribers at 1:45 p.m. on May 19. Click here to learn about this dynamic portfolio and market information service.
Yesterday afternoon Fed Chair Janet Yellen and the rest of the FOMC effectively poured a hefty dose of cold water on an increasingly flickering market flame. Over the last several weeks we've been ticking off the growing number of concerns that have led Wall Street bulls to become skeptical, if not downright bearish -- and that was before the latest round of FOMC minutes.
Based on the stock market's reaction to the minutes -- a 25-point or 1% drop in the S&P 500 -- a casual observer would think the Fed had set a firm timetable for boosting rates. What the always upbeat central bank said, however, was an interest-rate increase in June was just possible if incoming data showed an improving economy.
The two key words in that statement are "possible" and "if." As we've seen from much of the recent data, the likelihood of that is rather low.
Meantime, while the headline figure for this week's April Industrial Production was better than expected, the upside came almost entirely due to a surge in Utilities and a modest improvement in manufacturing. Before one gets his or her hopes up, however, the utilities index spiked 5.8% as demand for electricity and natural gas returned to a more normal level after being suppressed by warmer- than-usual weather in March -- hardly something that points to a sustainable improvement in the industrial economy. Deep misses in both the May Empire Manufacturing and May Philly Fed Index do not point to a pronounced rebound in the domestic industrial economy.
On the inflation front, much was made about the "hotter"- than-expected April CPI figure of 0.4%. Let's remember, though, the CPI figure includes both gas and food. In the last month alone, gas prices jumped more than 10% on the continued lift in oil prices. Examining the core CPI reading of 0.2% for April, it was in line with expectations. Moreover, as we pointed out yesterday, year-over-year comparisons dipped in April compared to March for the CPI, meaning that inflation actually cooled month over month.
Put it all together and it seems the stock market has once again jumped the gun when interpreting what the Fed said. We've seen it before, and odds are we will see it again.
While we suspect calmer heads will prevail, in the short term it makes for a very choppy market.