Wall Street economists on Tuesday were surprised by disappointing housing data, as U.S. housing starts fell 9.5% in April, compared to an expected 2% decline — the latest in a string of economic reports that have missed expectations both to the upside and the downside by wide margins. Meanwhile, the Federal Reserve is unlikely to signal any change in monetary policy over the summer, which could make trading stocks a bit boring, says one veteran trader.
Summer tends to be less liquid and a less eventful time in the markets, according to Keith Bliss, Capital2Market president, who explained to Yahoo Finance Live, "On Fridays getting toward the summer, by about 1 o'clock, everybody checks out. They'll lock in their positions and go home [to] live another day. And, I dare say — I think throughout the rest of May and into the summer — we'll probably grind sideways in the market. Maybe trend a little bit higher."
Especially since the Fed isn't making waves, despite high price inflation data at both the consumer and producer levels. Consumer price inflation jumped 4.2% for the month of May — the highest level since 2008. The S&P 500 (^GSPC) suffered its worst drop since February on May 12, the day CPI data was released, as market participants priced in a Fed that may be prepared to step on the brakes a bit earlier than anticipated.
For sustained price inflation, higher input costs need to be passed through to the consumer. Meanwhile, the housing starts data released Tuesday morning reveals that higher home prices are curbing demand. Even lumber futures (LB=F), which had surged over 500% from the 2020 lows have plunged 27% from their record high in less than two weeks. High lumber prices are adding $36,000 to the average new home price.
But Bliss believes traders who are selling stocks in reaction to hot economic data are simply getting it wrong and that the Fed is still in a wait and see mode. In other words, the markets would need a separate catalyst when economic data comes in mixed.
"I can't see anything on the near-term horizon that would give us a catalyst to go up or go down — especially as we get out of earnings season," Bliss says.
In a separate email statement to Yahoo Finance, Bliss also lays out some key technical levels to watch in the S&P 500, pointing out it will be difficult for the market to get ahead of itself — or overbought, as traders say.
"The [S&P 500] will be neutral if it trades up to around 4200. Overbought readings would not kick in until around 4325 on today's read. Unless there is something on the horizon that I cannot see right now," he says. "I can't envision us getting up to [those] readings over the next couple months."
All of this changes, however, if shocking, mainly to the upside, data is released over the coming months — signaling that the recent surge in activity isn't merely transitory and that higher prices may be here for awhile.
"[I]f we continue to see these hot numbers over the summer, then that will change the calculus, as the Fed will likely need to start doing something — reducing the buying program, raising rates, jawboning the market, etc. — to try and cool down prices," says Bliss.
Jared Blikre is an anchor and reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared