Stocks appear headed for a higher open this new trading day. Investors received data on import and export prices, pre-market. According to the U.S. Bureau of Labor Statistics, the cost of imports advanced a meager 0.1% in September, versus an expected month-to-month increase of 0.5%. Excluding fuel, the import price index slipped 0.3%, compared to a decline of 0.1% in August. Year over year, import prices fell 1.7% and export prices were down 4.1%. Indications are that overall inflation, though still elevated, is slowly moderating. Shortly, the University of Michigan will release its preliminary consumer sentiment reading for October, which is anticipated to move down to 67.4 from 68.1 in September. High prices are putting a damper on how consumers are feeling about their financial situation. Additionally, leading banks will kick off a new earnings season today.
The major stock market indexes have displayed some firming, after hitting lows early this month. They attained respective 52-week highs at the end of July. Both the tech-heavy NASDAQ composite and the broader Standard & Poor’s 500 Index are comfortably in the black, up about 30% and 13%, respectively, year to date. The blue-chip Dow Jones Industrial Average is struggling to hold on to a gain in the 1% range. All three indexes look to finish this week with close to a one-point improvement.
This week, all eyes were on the September Producer Price Index (PPI) and Consumer Price Index (CPI) figures, as well as the latest initial jobless claims number. The headline PPI and CPI measures surprised economists and Wall Street, being stronger than expected. On a positive note, however, adjusting for volatile food and energy prices, the indexes were essentially flat. There was not much of an investor reaction to the new PPI and CPI data. (Strife in the Middle East bears watching, as it could impact energy prices.) On Thursday, increases in 10-year and 30-year U.S. Treasury bond yields, to 4.71% and 4.85%, respectively, though, pressured share prices. Jobless claims were generally in line with estimates.
Next week, investors will parse updated information on manufacturing, industrial production, capacity utilization, retail sales, the housing market, economic indicators and, again, jobless claim filings. At the same time, third-quarter corporate earnings reports will continue rolling out. Barring any big surprises in the macroeconomic data releases and a regional expansion of the conflict in Israel, stock prices, in large part, will probably move on the strength of companies’ profits and managements’ outlook. Analysts on the Street have trimmed their third-quarter estimates, so companies have a fairly low hurdle to jump over. That said, fourth-quarter 2023 and first-quarter 2024 earnings expectations appear on the optimistic side; further cuts in estimates may be forthcoming.
The incoming stream of economic data and the latest corporate earnings news will be closely monitored by the Federal Reserve. Recently, some Fed officials have suggested that, given rising long-term Treasury yields, the central bank may not need to implement another hike in the federal funds rate (currently 5.25%-5.50%) at its upcoming October 31-November 1 meeting; action at the December get-together remains a question mark.
A reasonably good earnings season and clear indications from the Fed that it’s done hiking short-term interest rates, though not certainties, likely would support stock valuations to yearend. Still, caution is warranted, considering the economic effects of persistent inflation, slowing wage growth, the higher cost of borrowing, and tightening consumer budgets. Investors would do well to maintain ample investment portfolio diversification, inclusive of stocks, bonds, and cash. – David M. Reimer
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
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