Stock futures point to a mixed open today. Presently, Philadelphia Federal Reserve President Patrick Harker is speaking about the central bank’s take on the economy and its inflation-fighting strategy, while providing his own thoughts. His comments will be followed later today by Fed Governor Christopher Waller’s view. Investors will be closely watching for any hints of a change in Fed policy. In the meantime, this morning, they will be parsing new data on existing home sales for the month of December. A decline from the 4.09 million level in the previous month is expected, given elevated mortgage rates.
Thus far this holiday-shortened week, the equities markets have turned in a mixed performance. Through early Wednesday morning, the tech-heavy NASDAQ composite was up and the broader Standard & Poor’s 500 Index was trading about flat, but the blue-chip Dow Jones Industrial Average was displaying some moderate softness. Investor mood decidedly soured as the mid-week trading day progressed. That’s because reported domestic retail sales for December showed visible weakness. Evidence emerged that industrial production slackened, as well. Also pushing markets lower, were comments by St. Louis Fed President James Bullard that short-term interest rates should be raised by one-half of a percentage point, to a range of 4.75%-5.00%, at the central bank’s upcoming meeting to be held from January 31st to February 1st.
Last year, the Fed raised short-term borrowing rates by 4.25 percentage points (to 4.25%-4.50%), and began to reduce bond holdings on its balance sheet, via fewer purchases and maturities, thereby tightening liquidity in the financial markets. These actions have helped to rein in inflation. Notwithstanding Mr. Bullard’s comments, Fed officials appear more inclined to next lift rates by one-quarter of a point. Currently, the end goal seems to be to bring rates just above the 5% mark, probably before summer. That goal could possibly change, depending on the strength of corporate earnings (now being reported for the December quarter), managements’ guidance, additional readings on the Consumer Price Index, and further employment data releases. At this juncture, the Fed would like to see a continued slowing of growth in goods and services prices, an easing of wage gains, and a somewhat higher unemployment rate. If all goes well, which is by no means certain, the central bank could conceivably execute a “soft landing” for the economy – meaning no recession.
Stocks appear to be priced for the occurrence of a soft landing. With two-year Treasury notes having yields below the current Federal Funds rate range, the bond market seems to be saying the Fed is close to winding down its inflation-reduction effort, a view that officials deny. Stocks performed reasonably well in the first two weeks of 2023. This week, they are taking a bit of a breather. Last year, the Dow held up best in a down market and, this year, until yesterday, the NASDAQ took the forward position, posting gains. Some Wall Street pundits say the early gains were just a “head fake” in an ongoing bear market.
Uncertainty persists. So far this winter, the U.S. and European economies are holding up better than economists had feared. China’s recent suspension of COVID-19 restrictions should lend support to global supply chains, but there is concern that it could reignite global inflation as demand for goods and materials ramps up. Rising coronavirus infections in that country, as bad as they are, could, however, act as a brake on prices, if industrial activity wanes. All considered, we suggest a “barbell” approach to investing; specifically, maintaining significant portfolio weightings in value/defensive stocks and high-quality growth issues.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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