Two competing forces dominated the markets this week: strong equity momentum powered by AI and technology stocks balanced against inflationary pressures. Watch the full video for Doug’s analysis of current consumer sentiment, oil prices, and the “odd trading behavior” in the gold markets.

TRANSCRIPT:

Hello, everybody. My name is Doug Huber, I’m the Deputy Chief Investment Officer here at Wealth Enhancement Group. Welcome to this week’s 7 Market Movers series for the week of May 11. This is where we break down the key developments across the equity markets, fixed income, commodities, and the economy.

This week, markets continue to balance these two competing forces. You’ve seen the strong momentum in US equities, particularly amongst technology and AI related stocks, but it’s pressured by against this renewed inflationary pressure, higher energy prices and the rising long term interest rates that are kind of being a cause or effect of that. And so here’s the 7 Market Movers we’re watching this week. First and foremost, great week in the equity markets. The week started on strong footing as the S&P 500 and NASDAQ Composites fresh new highs on Monday and really driven by technology shares. That theme pretty much continued throughout the week as of close of business today on Thursday. I do believe that both those indices will likely close at new highs or darn close to them.

Like I mentioned, you know, a lot of this has come from the AI and technology leadership remaining front and center. And I think that’s really continued to lead the narrative this week. AI related demand has certainly been at the forefront and we’ve seen that in earnings this quarter. On the whole, we’ve had strong earnings for the quarter, but this week particularly you saw names like Cisco really being one of the notable movers after, you know, with their shares jumping after better than expected earnings, particularly tied to that AI infrastructure demand.

And I think that strength not only helped lift the Dow, but it certainly led to more enthusiasm across the markets on this concept of technology spending around AI. And so the takeaway here is that it shouldn’t come as any surprise, but we do believe that this AI investment cycle is going to continue to lead the narrative. It’s going to continue to be a market driver. But with valuations elevated, with rates potentially staying higher for longer, markets are gonna be more sensitive to any disappointment in earnings and guidance.

So it’s really an execution story from here. So keep that in mind because I do think we’re going to see winners continue to win and those that aren’t living up to expectations or potentially guiding softer getting punished for that in the market.

The other big news this week was inflation data. The April CPI or consumer price index rose 0.6% month over month following 0.9% in March and on a year over year basis was up 3.8% which was higher than expected. Obviously most recently energy has been the major contributor with that energy index rising 3.8% in the month of April alone and accounting for kind of more than 40% of the monthly increase. But even so, core CPI, which excludes food and energy rose about 0.4% for the month and 2.8% year over year.

Those were both higher than expected. The other side of the inflationary kind of equation is the producer price. And so the PPI or producer price index rose 1.4% in April with final demand goods up 2% and services up 1.2%. Again, energy playing into that, but up higher than expected.

So for markets, this matters because I think stickier inflation is likely to reduce any near term rate cuts and keep pressure on bonds here. So the market is trying to figure out most pundits have now actually completely omitted the concept that the Fed will cut rates this year. Now that’s obviously going to depend upon when Chairman Powell leaves office. It does appear pretty evident that Kevin Warsh will be the new head of the Fed and he likely has a higher propensity to maybe cut rates.

But with the economy where it is, growing strong, inflation still putting pressure on it, it’s gonna make it harder and harder for the Fed to press the cut button anytime soon.

So with that, inflationary pressures hit bonds the most. Treasury yields have remained relatively elevated this week, although they are trading in a pretty specific band. And so the back end of the curve, the 30-year, the longest part did move above 5% this week, which is a bit of a psychologically important level for long duration bonds. And so that’ll be something to watch.

It’s edged back in towards the end of the week here, but longer term yields matter. They feed directly into things like mortgage rates, corporate borrowing costs and the discount rates that investors use to value equities. And so for growth stocks in particular, higher long term rates become a headwind even when earnings momentum remains strong.

And so it’ll be important to watch what the bond market prices in here. If they stay relatively range bound, I don’t think it will be too much of an issue, but if we do start to see a breakout higher, it could start to have impact on equity markets. On the consumer side, we did see relatively kind of positive data. Retail sales gave a bit of a mixed read on the consumer.

April retail and food sales rose about 0.5% from March and up about 4.9% from a year earlier. So that’s positive, but it is a bit of a slowdown from March’s stronger increase. Labor markets also remain relatively firm. I’d say I think the initial jobless claims for last week came in at 211,000, which is up from a revised 199,000, but still relatively low by historical standards.

So don’t think the consumer picture is flashing red just yet, but there’s certainly some signs of pressure there. We know the lower end of the consumer spectrum is certainly facing more and more pressure. Prices continue to go up and in general consumer sentiment, if you look at that as a gauge, the consumer is not feeling great about the economy and that will be important. It hasn’t affected their behavior yet, but on a long enough time, if we all start to feel more negative about an economy, it’s certainly gonna affect what we do with our dollars.

On the commodity side, oil stayed elevated on continued geopolitical headlines at risk. Obviously we have not flushed out or gotten to a truce with Iran at this point. They are trying to negotiate a peace deal here, but it seems very fragile with any headline kind of really shaking markets.

And so Brent crude has remained above $100 a barrel specifically based on the fact that the Strait of Hormuz continues to be relatively shut in and it seems like every day there’s more Iranian fast boats kind of patrolling. We’re going in, it’s a lot of volatility there. And so expectations is oil will remain elevated for some time. And I would believe that even if we do see some type of peace deal, you’re not gonna see oil immediately go all the way back to where it was before the conflict. Probably settles out somewhere in the middle because I think everybody would recognize that any peace deal is going to take some time to not only kind of be cemented, but actually until everybody kind of believes it is there and there to stay.

The last area to touch on is gold. It certainly has been an area of discussion for some time now. I think it obviously had a very strong run late last year and early this year.

It’s typically thought of as a defensive asset, but it’s actually been experiencing some kind of odd trading behavior. And I think really what that comes down to is when you, at least in the most recent past year, I think it’s actually trading more off what long term rates are doing is long term rates rise. You can see periods where gold sells off because gold is not a yielding asset. So it is one of those areas that I think now trading in sympathy with rates. If you’re not earning anything for gold, you can swap that into something that is earning you some money. So I think there is a bit of a rotation going from gold towards rates.

To wrap it up, this week’s market story has really been based on that strong equity momentum. Like we said, all time highs again, really driven by the AI trade, semiconductors, AI infrastructure technology.

But underneath the surface, there’s still a lot of tension from the macroeconomic developments. A lot of it’s tied to inflationary pressures, which we could think might be fleeting if we can get some clarity on the Iranian situation. But the fact of the matter is until that happens and until the market has a lot of confidence in that, the expectation is there will be volatility in rates, in commodities and that bleeds through to the equity market. So that’s it for this week’s 7 Market Movers. We appreciate you tuning in. We’ll be back with you next week and we’ll have more information then. Thanks so much.