3 Reasons June Gloom Looms for U.S. Stock Market

Stocks on Wall Street are on pace to end May on a wobbly note as investors continue to gauge the outlook for interest rates and inflation while waiting on a political resolution to the U.S. debt ceiling situation.

The tech-heavy Nasdaq Composite is on track to come out on top in May, with a roughly 6.5% gain heading into the final trading session of the month as investors piled into AI-related names, such as Nvidia (NASDAQ:NVDA).

The benchmark S&P 500 index is about 0.9% higher this month.

Meanwhile, the blue-chip Dow Jones Industrials Average is set to be the biggest laggard in May, down 3.1% as of Tuesday’s close.

As a volatile May comes to an end, investors should prepare themselves for fresh turmoil in June, which has a reputation for being one of the worst months of the year for the stock market.

Since 1990, the S&P 500 has declined an average of about 0.4% in June, and this year could be no different.

As such, here are three key dates to watch as the calendar flips to June:

1. U.S. Jobs Report: Friday, June 2

The U.S. Labor Department will release the May jobs report at 8:30 AM ET on Friday, June 2, and it will likely be key in determining the Federal Reserve’s next policy decision.

The consensus estimate is that the data will show the U.S. economy added 180,000 positions, according to Investing.com, slowing from jobs growth of 253,000 in April.

The unemployment rate is seen edging up to 3.5%, one tick above the previous month’s 53-year low of 3.4%, a level not seen since 1969.

Prediction:

• I believe the May jobs report will underscore the incredible resilience of the labor market and support the view that more rate hikes will be needed to rein in the red-hot labor market.
• Fed officials have signaled in the past that the unemployment rate needs to be at least 4.0% to slow inflation, while some economists say the jobless rate would need to be even higher.
• To put things in context, the unemployment rate stood at 3.6% exactly one year ago in May 2022, suggesting that the Fed still has room to lift rates, even if traders are betting on a pause.

2. U.S. CPI Data: Tuesday, June 13

The May consumer price index report looms large on Tuesday, June 13, at 8:30 AM ET, and the numbers will likely show that neither inflation nor core inflation are falling fast enough for the Fed to pause its inflation-fighting efforts.

While no official forecasts have been set yet, expectations for annual CPI range from an increase of 4.6% to 4.8%, compared to a 4.9% annual pace in April.

The headline annual inflation rate peaked at a 40-year high of 9.1% last summer and has been on a steady downtrend since, however, prices are still rising at a pace over twice the Fed’s 2% target range.

Meanwhile, estimates for the year-on-year core figure - which does not include food and energy prices - center around 5.4%-5.6%, compared to April’s 5.5% reading.

The underlying number is closely watched by Fed officials, who believe that it provides a more accurate assessment of the future direction of inflation.

Prediction:

• Overall, while the trend is lower, the data will likely reveal that inflation continues to rise far more quickly than the 2% rate the Federal Reserve considers healthy.
• I believe there is still a long way to go before Fed policymakers are ready to declare mission accomplished on the inflation front.
• A surprisingly strong reading, in which the headline CPI number comes in at 5.0% or above, will further dash hopes for a June pause and keep pressure on the Fed to maintain its fight against inflation.

3. Fed Rate Decision: Wednesday, June 14

The Federal Reserve is scheduled to deliver its policy decision following the conclusion of the FOMC meeting at 2:00 PM ET on Wednesday, June 14.

As of Wednesday morning, financial markets are pricing in a roughly 60% chance of a 25-basis point rate increase and a near 40% chance of no action, according to Investing.com’s Fed Rate Monitor Tool.

But that, of course, could change in the days and weeks leading up to the big rate decision, depending on the incoming data and ongoing efforts to get the debt ceiling deal approved by Congress.

If the U.S. central bank does, in fact, follow through with another quarter-percentage-point rate hike, which would be the 11th move in the past 13 months, it would put the benchmark Fed funds target range in a range between 5.25% and 5.50%.

Fed Chair Powell will hold what will be a closely watched press conference shortly after the release of the Fed's statement as investors look for fresh clues on how he views inflation trends and the economy and how that will impact the pace of monetary policy tightening.

Prediction:

• As inflation remains stubbornly high and the broader economy holds up better than expected, my personal inclination is that the Fed will decide to raise rates by 25bps at the June meeting. In addition, I believe Powell will strike a surprisingly hawkish tone and warn that there is still more work for the Fed to do to bring down sticky inflation.
• While I agree that the current tightening cycle may be close to the finish line, I reckon the policy rate will need to rise at least another half of a percentage point to between 5.75% and 6.00%, before the Fed entertains any idea of a pause or pivot in its battle to restore price stability.
• The U.S. central bank is at risk of committing a major policy error if it starts to ease policy too soon, which could see inflationary pressures begin to reaccelerate despite worries over a looming economic downturn.
• If anything, the Fed has more room to raise interest rates than to cut them, presuming it follows the numbers.

What To Do Now

Once again, it’s no secret that we are entering one of the weakest months of the year historically. Therefore, some weakness in June would not be surprising in my view.

Over the near term, I expect the U.S. stock market to correct lower as the Fed could continue raising borrowing costs through summer and keep them higher for longer.

Traders who primarily enter long positions may opt to take some time off during the month of June or exit their positions quicker than usual and head to the sidelines if the market starts to turn.

In contrast, long-term investors may wish to buy the dip in risk assets to take advantage of lower prices, as history suggests the market could snap back sharply in July.

Overall, it’s important to remain patient and alert to opportunity. Adding exposure gradually, not buying extended stocks, and not getting too concentrated in a particular company or sector are still important.

Taking that into consideration, I used the InvestingPro stock screener to build a watchlist of high-quality stocks that are showing strong relative strength amid the current market environment.

Not surprisingly, some of the names to make the list include Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Meta Platforms, Tesla (NASDAQ:TSLA), Visa (NYSE:V), United Health (NYSE:UNH), Exxon Mobil (NYSE:XOM), Broadcom (NASDAQ:AVGO), and Chevron (NYSE:CVX) to name a few.

Source: InvestingPro

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Disclosure: At the time of writing, I am short on the S&P 500 and Nasdaq 100 via the ProShares Short S&P 500 ETF (SH) and ProShares Short QQQ ETF (PSQ). I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.