Inflation Data Fuels End-of-Quarter Pop in Stocks

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Stocks started Friday on a high note thanks to encouraging inflation data. The buying power only strengthened as the session wore on, with all three major indexes extending their weekly and monthly gains.

Tech and communication services stocks once again helped lead markets higher – and propelled the Nasdaq Composite to its biggest quarterly gain in nearly three years.

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The Bureau of Economic Analysis said this morning that its personal consumption expenditures (PCE) price index, the Fed's preferred measure of inflation that tracks consumer spending, rose 0.3% month-over-month in February, and was up 5% year-over-year. This was lower than the increases seen in January. Core PCE, which excludes volatile food and energy prices, also rose at a slower pace, on both a monthly and annual basis.

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As for what this means for the next Fed meeting? It's a near-tossup, says Bill Adams, chief economist for Comerica Bank. "Forward-looking information like layoff announcements and recent banking headlines suggest a pause in rate hikes may be appropriate, while backward-looking information like recent jobs, consumer spending, and inflation data support another hike."

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Also in economic news, the University of Michigan downwardly revised its March consumer sentiment index (62.0 vs preliminary reading of 63.4), which was markedly lower than February's reading of 67.0. This was also the fourth straight monthly decline for the index.

"This month's turmoil in the banking sector had limited impact on consumer sentiment, which was already exhibiting downward momentum prior to the collapse of Silicon Valley Bank," the report stated. "Overall, our data revealed multiple signs that consumers increasingly expect a recession ahead."

Looking at today's single-stock movers, right-wing media platforms Rumble (RUM, +7.1%) and Digital World Acquisition (DWAC, +7.6%) were two notable gainers after last night's news that former President Donald Trump was indicted by a grand jury in Manhattan. Rumble also reported fourth-quarter results that included a sharp year-over-year rise in revenue (to $19.9 million from $2.9 million) and a monthly active user count that more than doubled from the year-ago period.

At the close, the Nasdaq was up 1.7% at 12,221, the S&P 500 rose 1.4% to 4,109, and the Dow Jones Industrial Average gained 1.3% to 33,274. All three benchmarks scored impressive weekly and monthly gains too. As for their Q1 performances, the Nasdaq finished the quarter up 16.8% – its biggest quarterly gain since Q2 2020, when it jumped 30.6% – the S&P 500 was 7.0% higher, and the Dow added 0.4%.

Don't give up on stocks

It was a wild first quarter for the equities market. "An early year stock rally fueled by hopes of a Fed pause proved short-lived," says Tony DeSpirito, chief investment officer at BlackRock's U.S. Fundamental Active Equities. "The first spoiler – hotter-than-expected inflation data – was followed by signs that rate hikes are having an economic impact as cracks emerged in the banking system." Going forward, those two counterforces "make the Fed's job more complicated as it becomes increasingly clear that taming inflation might not only incite recession but could also rock financial stability."

So what does this mean for investors? Don't give up on stocks, DeSpirito says, as they "continue to play a critical role in a long-term investment plan." Picking the best stocks to buy must include a focus on quality companies, like the best dividend growth stocks that are "built to weather diverse markets," he adds. Stable sectors are also solid additions to portfolios, DeSpirito says, with healthcare stocks in particular known for being recession resilient.

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With over a decade of experience writing about the stock market, Karee Venema is the senior investing editor at Kiplinger.com. She joined the publication in April 2021 after 10 years of working as an investing writer and columnist at a local investment research firm. In her previous role, Karee focused primarily on options trading, as well as technical, fundamental and sentiment analysis.