The stock market indexes appear poised to open in the green this morning. Key inflation data was released by the U.S. Bureau of Economic Analysis (BEA) just prior to the opening bell. For the month of September, the headline Personal Consumption Expenditures (PCE) index showed an advance of 0.4%, in line with economists’ outlook and the prior-month gain. On a year-over-year basis, this inflation measure came in at 3.4%, down slightly from the month-earlier pace of 3.5%. The core PCE index, which excludes volatile food and energy prices, rose 0.3% in the latest month, which was no surprise and was greater than the August increase of 0.1%. Year on year, the core PCE stepped up 3.7%, even with what was anticipated and slower than the 3.9% rate last reported. Investors appear to be viewing the news in a somewhat positive light.
Additionally, the BEA reported on personal income and spending for September. Personal income notched a modest 0.3% expansion, in comparison with the experts’ forecast of 0.4% and the August improvement of 0.4%. Spending climbed a strong 0.7% in September, greater than the 0.4% reported for the previous month. This data, along with the PCE numbers, will largely factor into the interest rate decision to be made by the Federal Reserve next week. The consensus on Wall Street is that the federal funds rate will remain at 5.25%-5.50%. A still-healthy domestic economy, resilient employment market, and persistently high inflation, though, suggest that the central bank’s Federal Open Market Committee could well raise short-term interest rates another 25 basis points in December or early next year.
Third-quarter earnings results have been rolling in from corporations. Most visibly, top banks and technology companies have already reported. Generally, the operating results have come in better than what analysts expected, though estimates had been moving lower prior to the start of the earnings season. We note that the U.S. Gross Domestic Product (GDP) growth figure for the quarter was a vibrant 4.9%. Recent indications are that the services sector continues to expand and the manufacturing sector is poised for possible renewed growth. Workers remain in demand and their wages are moving higher, with some support coming from organized labor actions.
Estimates for final-quarter 2023 GDP growth are subdued. More specifically, the average outlook is for about a 2% improvement. Economists see elevated interest rates as becoming more of a drag on business investment and consumer spending. Some parts of the commercial sector (along with affected workers), however, will benefit from U.S. legislation promoting the onshoring of manufacturing (e.g., battery development and semiconductor production). Even so, most managers, seeing less pricing power and rising conservatism on the part of consumers, anticipate a moderation in sales momentum and plan to keep spending budgets fairly lean, while looking for ways to cut costs and expenses. Notably, banks are raising lending standards and limiting loan growth.
Stocks, tech issues in particular, have fallen from their late-July highs. Investors are being highly critical of recent operating results and managers’ forecasts for future growth. Also considerably weighing on share prices have been high bond yields. Indeed, the 10-year Treasury bond is now yielding close to 5%, a level not seen in 16 years. Investors can hold top-quality bonds and federally-insured money-market accounts with generous payouts, instead of riskier lower-yielding equities. Share prices might not bottom until it’s clear that the Fed is done hiking interest rates and the Treasury is finished issuing new bonds. (Concerns are mounting about the rising level of federal obligations.) Too, political uncertainty in the Middle East and other parts of the world may well continue to pressure stock valuations. Diversification, that is, holding stocks, bonds, and cash, is an appropriate defense in these uncertain times. - David 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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