Last week, the three major U.S. stock indexes closed lower. From a weekly perspective, the Dow Jones Industrial Average (DJIA) fell by 920.80 points, or 2.4%, to close at 37,983.24 points; the S&P 500 index dropped by 80.93 points, or 1.6%, to close at 5,123.41 points; and the NASDAQ index declined by 73.43 points, or 0.5%, to close at 16,175.09 points.

Key Takeaways:
CPI snapping the rate cut excitement
Stocks stumble after a steady march higher

The headliner last week was the latest Consumer Price Index (CPI) report, providing a fresh look at the all-important trend in inflation. The results were not what markets were looking for, with CPI coming in hotter than expected.

Consumer prices rose by 3.5% year over year in March, up from 3.2% the prior month. Core CPI, which strips out volatile food and energy prices, held steady at 3.8%, coming in slightly above consensus expectations. Services prices remain the fly in the ointment, with particularly large increases in medical costs and insurance premiums playing a role last month. While not captured in core inflation, the recent rise in oil prices is also driving worries of renewed upward pressure on headline CPI. The pace of improvement in core CPI has slowed. This means the next leg — in which core CPI trends toward the Fed’s 2% target — may prove more gradual (and challenging) than hoped.

Encouragingly, auto prices moved lower, and the pace of shelter inflation moderated again, hitting its lowest level since June 2022. The sharp drop in goods inflation over the past 18 months has been a key driver of the moderation in overall inflation. Durable goods prices remain in outright deflationary territory, falling again in March. We believe this trend reflects the healing of supply chains and an increase in manufacturing output.

Stocks have pulled back in recent days but remain only slightly below all-time highs. We think some temporary weakness is reasonable given the strength of the recent rally and the adjustments to policy expectations. That said, markets have handled this news fairly well, which we think reflects the still-favorable outlook for economic and corporate earnings growth.

It should not be lost just how strong and steady the stock market rally has been. Consider the following:

• The S&P 500 has declined the last two weeks but saw a stretch from November to February in which it was higher in 14 out of 15 consecutive weeks.
• In the last five months coming into last week, the stock market had experienced only five days in which it declined by 1% or more. And in four of those instances, the market rose by 1% the next day.
• Despite the weakness in recent days, the S&P 500 is just 2% below its all-time high, which is the largest pullback since October of last year. The stock market has returned 27% during that stretch.

AiF believes that the market is not afraid of no rate cuts, or even rate hikes. The market fears uncertainty. As for whether there will be rate cuts this year, the Federal Reserve has made its stance clear, read more:
AiF insight | Market Panic Selling, Fed Makes Clear Statement 
AiF insight | No Rate Cut This Year? Stock Market Crash Ahead?
AiF insight | Concerns About Rates Cutting

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