Weekly Newsletter: May 18, 2026
The economist of the week was Captain Obvious. Energy prices have been rising over the past two months, so it came as little surprise that the inflation data, both consumer and producer prices, were above estimates. If there was a surprise, it was the high jump in producer prices outside of energy-related pressure. What may not be so obvious is the next steps for the Fed. Kevin Warsh is now the new Fed Chief and will preside over the next meeting in June, when it is expected that the Fed will stand pat. What will be interesting will be his first press conference, when it is anticipated that he will outline Fed policy going forward. Based on expectations from the CME’s Fed Watch website, there is a little less than a 50/50 chance of a rate hike by year’s end. Also less obvious is the consumer’s reaction to higher energy prices and inflation in general. Retail sales showed a consumer willing to spend, especially online and on “core” goods. Based on this report, the consumer is not yet pulling back in a meaningful way that would indicate a slowing economy. This week will be earnings from the retail sector, which should give additional insight into the consumer and any shifts in spending.
The economic data took a back seat (again) to the AI trade. Should investors worry about the economy? The evidence is starting to build that the economy could struggle for the remainder of the year. That doesn’t mean an imminent recession, but the carefree days of the past three years may be coming to an end. The inflation data was troubling on a few fronts. First is wage growth, which, after rising faster than inflation over the past few years, has dipped below inflation. Persistently slow wage growth vs. inflation can be a recipe for spending to pull back. Second, inflation has been dismissed as an energy story; when stripping out the highest and lowest portions of the data, inflation is rising quickly. Retail sales are still in good shape, but persistently higher inflation readings could force consumers to change their spending later in the year. All of the above does not mean that the US economy is heading toward an iceberg, but it does mean that all is not as rosy as it has been in the economy. The Fed may not be stepping in by cutting rates, as much of the problem lies with energy, which the Fed is powerless to change.
The one part of the market that is sitting up and noticing inflation is the bond market. The shortest maturities have been nailed to the fed funds rate. Going out beyond a one-year maturity, interest rates have been rising all month. Interest rates have increased by nearly a quarter of a percentage point for maturities between one and thirty years. As mentioned above, the betting on the next rate move is an increase sometime in the latter half of the year. Commodity prices, not just oil, have been rising this year. Ultimately, those prices will make their way to the consumer level. Even if there is a resolution to the war in the next week or two, much of the damage has been done. Returning to more “normal” prices will likely take more than a year.
Last week was an interesting week for the market. Most of the popular averages hit all-time highs on Thursday, before taking a break on Friday. The averages finished higher on the week, nearly three stocks finished lower on the week than rose on the New York exchange, while it was a two-to-one advantage to decliners on the OTC market. Last week was a perfect week to see how the largest stocks in the market drove the averages, without the average stock doing well. Rather than rising last week, the equalweighted indices fell by more than 1%. Small stocks fell by more than 2%, with similar declines for international markets. Today, over 40% of the SP500 is comprised of the top ten names. Nvidia reports earnings this week, and any disappointment could spell trouble for the averages. Another earnings and revenue beat could see the averages rise sharply without much help from the rest of the market. There has been plenty of discussion about the “K” economy, with those at the top end of the K doing well, and those at the bottom not as much. It is a similar story for investors; those investing in the top 10 companies are doing very well, while the remaining parts of the market are struggling. Investment books always talk about a reversion to the long-term mean. The markets over the past decade are putting that maxim to the test.
Retail companies report earnings and should provide another window into the consumer. Nvidia earnings will highlight the week, but less obvious will be earnings from the retailers as market movers.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.