Looking at the futures market, stocks will probably start today’s trading on a mixed note. Early this morning, the Bureau of Labor Statistics (BLS) released its producer price index (PPI) measures for the month of December. The headline index showed a surprising 0.1% month-to-month decline, compared to economists’ estimate for 0.1% growth and the November result that was flat. Excluding volatile food and energy prices, the core PPI was unchanged, versus the outlook for a 0.2% increase; previously, this economic gauge was also flat (revised). Year over year, the core PPI stepped up 2.5% last month, matching expectations and slightly hotter than the recalculated November advance of 2.4%.
The latest PPI reading from the BLS follows yesterday’s consumer price index (CPI) report. December’s CPI trend was somewhat stronger than many on Wall Street had been expecting. Taken together, the two readings were just a tad disappointing —investors were anticipating a further pronounced easing of inflation. We would not be surprised to see a sustained general slowing in price growth for both goods and services through the end of this year. As seasoned economy-watchers probably know, it’s better to monitor a longer period, e.g., six months, rather than just one month of inflation data. Currently, the longer-period trend is favorable. The latest information does not suggest any drastic changes to the Federal Reserve’s view of the economy or to its interest-rate outlook.
Stocks seem likely to close this week on the plus side. Over the past four days, the tech-heavy NASDAQ improved more than 3%, while the broader Standard & Poor’s 500 (S&P 500) and the blue-chip Dow Jones Industrial Average increased 1.8% and 0.7%, respectively. This follows negative showings for the first week of the new year. Year to date, equities are running about flat. Next week, which is shortened by the Dr. Martin Luther King, Jr. holiday, new figures on import prices, retail sales, industrial production, capacity utilization and, among other data points, initial jobless claims will roll in. That information is valued and will have some impact on share prices. Importantly, another earnings season begins today, as the top domestically domiciled banks report. Their managements’ view on near-term business prospects surely will carry significant weight with investors, as well as the central bank.
Many on Wall Street are sticking with their expectations for five to six one-quarter-point reductions in the federal funds rate (5.25%-5.50%) over the span from March to yearend. Even so, it seems that the recent inflation data have chipped away some of their confidence. For their part, Fed officials have essentially been guiding for about three 25-basis-point cuts this year. Share-price volatility will be impacted by the decisions that actually come out of the Fed, as well as by reported trends in corporate earnings and the broader economy. We note that, as a whole, equities analysts are expecting healthy net-profit results for S&P 500 companies, which, of course, is not guaranteed.
For now, we advise investors to focus on the equities of industry leaders, especially those that consistently generate solid sales, earnings, and cash flow growth. Top technology stocks may be hard pressed to match their stellar 2023 performance, but further gains cannot be ruled out. Still, other alternatives in the industrial, healthcare, financial, and consumer staples sectors appear to possess better price appreciation potential. Overall, a high single-digit market advance is conceivable this year, which would be in line with the historical averages. - David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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