Equity Rally Broadened Last Week, But Rating Downgrade Could Suspend The Rally

Positive trade negotiations with China and lower than expected inflation data helped lift all boats in the market last week.

Much of the progress made by equities since the April 7th low may face some headwinds since the Moody’s rating agency decided to drop the U.S. one notch on the ratings scale. It’s important to note that this has already been done by S&P (August 5, 2011) and Fitch (August 1, 2023) rating agencies. It's comforting to know that Moody's was extra careful in their analysis to determine the downgrade almost 14 years after S&P had already come to the same conclusion. The results in those two instances were between an 8% to 9% decline in equities. Markets could absorb the final rating agencies move with ease or there could be a temporary pullback. In each of the prior instances, markets were higher 4 to 6 months later.

Inflation data was well received last week as both the Consumer Price Index and Producer Price Index were lower than expected.

The Cleveland Fed’s Nowcast expectation for May inflation shows little change at 0.1%. Corporate profitability is running well above average and first quarter earnings beat analysts expectations by more than the 5-year and 10-year averages. There were few mentions of “layoffs” on earnings calls, meaning consumers do not seem to face any immediate threats of job losses. While breadth has improved dramatically, the recent downgrading of U.S. debt is a wild card that is likely to increase volatility in the short-term.

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