Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.
Investors appeared to breathe a sigh of relief last week as the April Consumer Prices Index (CPI) showed that inflation continues to slow. Core CPI (which excludes volatile food and energy prices) rose by 3.6% over the last year, a decline from 3.8% in March and in line with the expectations. The improved inflation data was accompanied with more evidence that the economy is slowing in the form of weaker retail sales and industrial production. In an environment where inflation is seen as the main enemy, market participants appear willing to overlook the prospect of a softer economy.
Bond Prices Rise, So Do Equities
This sanguine view of the future was seen most notably in the yield of US Treasury bonds as yields fell for both shorter and longer term debt. As a consequence, the Morningstar US Core Bond index rose 0.57% over the week and is up 2.32% over the last month. Although this will be a relief for bond investors who have experienced negative returns in two of the last three calendar years, it is important to note that while inflation remains the focus of investors, bonds are less likely to provide diversification for the equity positions in portfolios as the prices of equities and bonds are more likely to be correlated. This may change if investors become more concerned about a weakening economy.
Technology Leads the Way
Equity investors also displayed their relief at the improving inflation picture with the Morningstar US Market index rising 1.6% over the week. Within the US market, technology companies showed the greatest gains as investor enthusiasm for AI was further kindled by the release of Chat GPT’s latest model. The stock prices of Nvidia, Microsoft and Apple all rose over the week pushing the Morningstar US technology index up 2.97%. Nvidia is likely to be back in the spotlight this week as it releases it latest financial results on Wednesday. Find out what Morningstar’s Nvidia analyst Brian Colello is expecting here.
Meme Stocks Are Back
The so-called ‘meme stocks’ were back in the headlines last week as GameStop rose 271% before falling back 57% to end the week up 58%. For those who prefer their rollercoaster rides to be confined to the theme park rather than their portfolio, I recommend this excellent article by Morningstar Portfolio Manager John Owens who likens picking stocks to a visit to the grocers.
A Lot of Fed Comment, But Investors Can Tune Out
Despite improved inflation data and falling bond yields, expectations for a near term cut in interest rates remain stable (source: CME FedWatch). This may change this week as a paucity of economic data coupled with a surfeit of comments by Federal Reserve officials may encourage investors to alter their expectations. While this can help the folk of Wall St. pass the time, it has little to do with investing and can be safely ignored by those focused on reaching their financial goals.
