The S&P500(SNPINDEX: ^GSPC) is up 25% through 2024, putting the broad index on track for one of the strongest annual performances of the 21st century. Factors contributing to this positive effect include enthusiasm about artificial intelligence, strong corporate earnings and encouraging economic data.
The Federal Reserve’s recent shift toward rate cuts has also boosted investor sentiment. Policymakers raised the federal funds rate at the fastest pace in decades to stem raging post-pandemic inflation. That benchmark interest rate eventually reached its highest level in twenty years, before the Federal Reserve moved to cut interest rates in September 2024.
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Lower interest rates stimulate the economy by encouraging consumer spending and business investment. Policymakers have already cut rates by three-quarters of a percentage point, and the market expects another quarter-point cut when the Federal Open Market Committee meets in December, according to CME Group‘s FedWatch tool.
That puts the stock market in a precarious position. Expectations for rate cuts could change based on a key economic data point set to be released on Wednesday, November 27. That means tomorrow could be a big day for the stock market.
Most investors are probably familiar with the consumer price index (CPI), which measures inflation based on the spending habits of consumers in urban or metropolitan areas. But the Federal Reserve prefers a different measure of inflation, known as the Personal Consumption Expenditure (PCE) price index.
The PCE price index provides a more comprehensive view of price pressures across the economy. It covers rural and urban consumers, and also takes into account expenses incurred on behalf of the consumer, such as health care costs paid by employers and government programs such as Medicare and Medicaid.
The Bureau of Economic Analysis will release the PCE price index for October before the stock market opens on Wednesday, November 27. Economists generally expect PCE inflation to remain stable at 2.1%, which would be identical to September’s reading. But some experts are skeptical as CPI inflation accelerated to 2.6% in October from 2.4% in September.
If the PCE price index for October shows a similar acceleration in inflation, the chances of policymakers cutting rates at the December meeting will plummet. And the stock market would likely fall sharply as investors digest the news.
Importantly, recent comments from Fed Governor Michelle Bowman underscore how closely policymakers will be watching the PCE price index for October.
“We have made significant progress in reducing inflation since the start of 2023, but progress appears to have stalled in recent months. The annual benchmark for core personal consumption expenditure inflation – which excludes food and energy prices – has moved sideways to around 2.7%. % since May, and the latest Consumer and Producer Price Index reports point to a similarly high or even higher figure for October.”
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In summary, the consensus estimate says PCE inflation for October will be 2.1%. But other economic data released in recent weeks suggests a possible reacceleration. If that happens, the stock market could fall sharply as investors recalibrate their expectations for future rate cuts.
In contrast, if PCE inflation for October falls below the consensus estimate, the stock market could move sharply higher. Unfortunately, investors cannot anticipate the outcome. But I think the wisest course of action is to stay invested in quality stocks that provide good long-term exposure.
Granted, November 27 could be a tough day for investors who follow that advice, but the stock market has never been able to recoup its losses from previous declines. Conversely, investors who sell stocks to avoid a possible decline may miss a very good day and hesitate to buy again, waiting for a correction that never comes.
I’ll end with a quote from famous investor Peter Lynch. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than was lost in the corrections themselves.”
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Trevor Jennevine has no positions in any of the stocks mentioned. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.
The stock market could rise or fall sharply tomorrow (November 27). Here’s Why was originally published by The Motley Fool
