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- Stocks started 2023 on a tear but gave up some of those gains last week.
- Tuesday's inflation report marks the start of a crucial five-week stretch, according to Bernstein's Matthew Palazzolo.
- Investors are about to learn “whether the rally will sustain or we’ll give some of this back,” he told Insider.
Investors should get ready for a crucial period that'll determine whether stocks' start-of-2023 rally carries on or fizzles out, according to a top strategist at Bernstein Private Wealth Management.
Tuesday's Consumer Price Index report – which will show the rate at which US prices rose at in January – marks the start of a make-or-break stretch for equities, Matthew Palazzolo said in an interview last week.
Palazzolo pinpointed four key economic events over the next five weeks that he believes may set the tone for stocks for the rest of the year:
- CPI inflation report, February 14
- Non-Farm Payrolls report, March 3
- CPI inflation report, March 14
- Federal Reserve meeting, March 22
"It's absolutely an important stretch here," he told Insider. "A little bit more than a month from now, we'll have a great deal of evidence as to whether the rally will sustain or we'll give some of this back."
Stocks surged in January but gave up some of their gains last week, with the tech-heavy Nasdaq Composite suffering its worst five-day period in about two months.
Expectations of Federal Reserve interest-rate cuts later this year have helped fuel a rally but the wave of economic data coming out over the next five weeks could stop that in its tracks, according to Palazzolo.
The central bank's dual mandate calls for it to pursue price stability and low unemployment – so inflation prints and jobs reports are the crucial economic data points for determining its approach toward interest rates.
Hotter-than-expected inflation or continued labor-market strength could persuade Fed policymakers to carry on tightening monetary conditions, which would be expected to weigh on stocks by chipping away at the future cash flows that make up part of their valuations.
"Those data points are probably the biggest contributor to what the Fed ultimately does beyond March," Palazzolo told Insider.
"If there's enough evidence that inflation is still high or the labor market remains strong, that's going to place a greater probability on future hikes that aren't priced into the market," he added. "That would cause equity markets to soften from the levels they're at today."