Stock futures indicate a negative open to today’s trading. Thus far this week, the major domestic stock indexes have continued to move further off of their respective late-July highs. Declines of 1%-2% appear unavoidable for the full week. Of particular note in recent days were stronger-than-expected U.S. retail sales for the month of September, before and after adjusting for volatile auto purchases. Too, initial jobless claims for the week ended October 14th were a good measure below what economists had been anticipating. Other economic news that did not move the stock-market needle as much included soft Empire State and Philadelphia manufacturing surveys for October and, as measured for the month of September, an uptick in industrial production, a slight gain in capacity utilization, expanded business inventories, tepid housing market data, and an additional cooling of U.S. leading economic indicators.
This week, several Federal Reserve officials, most prominently Chairman Jerome Powell, discussed the economy and the central bank’s monetary strategy. Generally, the consensus of the Fed members is that the economy is proving quite resilient in the face of higher borrowing costs. Since early 2022, the federal funds rate has increased from near zero to 5.25%-5.50%. It was hoped that higher short-term rates would slow the economy and bring national employment supply/demand into better balance, helping to pull down inflation. U.S. government stimulus funds provided to businesses and consumers during the coronavirus pandemic, as well as legislation to restore domestic manufacturing, appear to have softened the impact of the Fed’s inflation-fighting policy. A recession might well be avoided, at least a severe one.
September-quarter corporate earnings are now rolling in and, so far, despite being hampered by elevated costs and expenses, they have been fairly good. Workers continue to be in demand and wages are favorable. Consumers, though becoming more frugal about their budgets, are still spending on goods and services. Gross Domestic Product (GDP) growth estimates for the remainder of this year have risen. Chairman Powell said that decent headway has been made in containing inflation, but stated that more work needs to be done. He seems to suggest another interest-rate hike is unlikely at the coming October 31-November 1 Federal Open Market Committee meeting. Even so, Mr. Powell has left the door open to a possible increase in December or early 2024.
The central bank will be parsing September-quarter corporate earnings results and managements’ near-term business outlooks, as well as new economic information. More specifically, next week, key reports will include updated measures of the Personal Consumption Expenditures index, personal income and spending, third-quarter GDP, initial jobless claims, and Standard & Poor’s flash manufacturing and services Purchasing Managers Indexes.
In the meantime, yields on Treasury bonds and cash holdings (most visibly, money-market accounts) have markedly increased, posing competition for stocks. (The 10-year Treasury bond yield is currently close to 5.0%, a 16-year high.) The prospect of higher interest rates for a longer period than many on Wall Street had been expecting makes equities less desirable investments. Too, current political risk in the Middle East, namely Israel, lends uncertainty to the global and economic business climate. An expanded conflict could push up energy prices, sparking increased inflation. Still, investors should stay in the stock market, but with ample diversification, while holding significant balances in bonds and cash. – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
CLICK HERE for more information on our services or call 1-800-VALUELINE (1-800-825-8354). Our account managers are available Monday through Friday, 8:00 AM to 6:00 PM Eastern Time.
