The S&P 500 has surged by 25% in 2024, putting it on track for one of its best annual performances of the 21st century. This remarkable growth is fueled by optimism surrounding artificial intelligence, strong corporate earnings, and encouraging economic data. Additionally, the Federal Reserve’s recent shift to rate cuts has boosted investor sentiment. After aggressively raising interest rates to combat post-pandemic inflation, the Fed reached its highest benchmark rate in two decades before pivoting to cuts in September.
These lower interest rates aim to stimulate consumer spending and business investment. With three-quarters of a percentage point already cut, the market expects another quarter-point reduction at the Fed’s December meeting, according to CME Group’s FedWatch tool. However, this optimistic outlook could face a challenge tomorrow, November 27, depending on crucial economic data about inflation that will be released.
The Importance of the PCE Inflation Data
Investors are familiar with the Consumer Price Index (CPI), which measures inflation based on the spending patterns of urban consumers. However, the Federal Reserve prefers the Personal Consumption Expenditure (PCE) price index, which provides a broader view of inflation, including rural consumers and expenditures made on behalf of consumers, like healthcare costs covered by employers and government programs such as Medicare.
The Bureau of Economic Analysis will release the October PCE price index before the market opens on November 27. Economists expect inflation to hold steady at 2.1%, matching September’s reading. However, some analysts are concerned because the CPI data for October showed an uptick to 2.6% from 2.4% in September.
If the PCE reading reflects a similar acceleration in inflation, it could diminish the likelihood of future interest rate cuts, leading to a sharp downturn in the stock market. The Fed is closely monitoring this data, and any deviation from expectations could have significant implications for both the economy and investor sentiment.
What This Means for Investors
If the PCE inflation data exceeds expectations, the stock market may face a steep decline as investors adjust their predictions regarding future rate cuts. On the other hand, if the inflation reading comes in lower than expected, the market could see a strong rally.
While there is no way to predict the outcome, the best strategy for investors is to remain invested in quality stocks with strong long-term prospects. Although November 27 could be a volatile day, history shows that the market typically recovers from declines over time. Conversely, attempting to time the market by selling stocks in anticipation of a downturn could result in missed opportunities for gains.
As legendary investor Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
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Trevor Jennewine does not hold positions in any of the stocks mentioned. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.