Early this morning, stock futures pointed to a negative open, dragged down by the disappointing quarterly reports from technology giants Amazon.com (AMZN) and Apple (AAPL). Key economic news in the mix includes the Bureau of Economic Analysis inflation figures for the month of September. Its Personal Consumption Expenditures (PCE) Index of prices showed a month-to-month increase of 0.3% and a year-over-year gain of 6.2%, both even with the previous month’s adjusted readings. Core PCE, which strips out volatile food and energy prices, advanced 0.5% from August and 5.1% from one year ago. The comparable August measures were 0.6% (on a monthly basis) and 4.9% (annualized). Real disposable income and real consumer spending (adjusted for inflation) posted respective increases of 0.6% and 3.8%, versus 2.3% and 3.6%, respectively, in August. The University of Michigan’s October data on consumer sentiment and inflation expectations, as well as the September pending home sales index measure, are due out shortly.
This week, leading up to today’s trading, the major market indexes turned in a mixed performance. Stocks began to fade at mid-week, with the Standard & Poor’s 500 giving up some of its gains, though still rising 1.5%, and the NASDAQ slid modestly into negative territory through Thursday’s close. The Dow Jones Industrial Average, gaining about 3%, held up the best. Most visibly, September-quarter earnings reports from social-media giant Meta Platforms (META), Internet search facilitator Alphabet (GOOG), and software developer Microsoft (MSFT) were headwinds for the broader market. Investors showed concern about weakness in the advertising sector weighing on the results of Meta and Alphabet, and a tepid personal computer segment dragging on Microsoft’s operating performance. As if that were not enough, after yesterday’s closing bell, online retailer Amazon.com (AMZN) and iPhone maker Apple (AAPL) released their sales and earnings for the quarter. Both traded lower on Thursday, and AMZN is down sharply in pre-market action Friday. Amazon is seeing slowing demand for consumer goods, and reducing staffing and real estate commitments as a result. Apple’s Web applications and television services sales have softened a bit, and there is speculation that sales of its newest iPhone model will be unspectacular.
Inflation remains a worry for the economy. Most of Wall Street expects the Federal Reserve to raise short-term interest rates by 0.75 of a percentage point at its Federal Open Market Committee meeting next week. That would mark the fourth hike of such magnitude in the central bank’s current aggressive plan to rein in inflation. In a positive sign for stocks, Fed officials seem open to increasing rates at a slower pace in December, possibly implementing only a one-half-point hike. The Wall Street consensus appears to be that one more increase, of one-quarter of a point, is likely early in 2023. If this speculated scenario holds true, the Federal Funds borrowing rates would range from 4.50%-4.75%. At that level, we would not be surprised to see the Fed take a pause in its effort, to gauge where inflation is going and how well the economy is faring.
At this time, the Fed’s actions seem to be having an impact. The housing sector is slowing, apartment rents are coming down, gasoline prices have become less burdensome, and growth in the cost of retail goods and services appears to be moderating. Aside from Fed action, consumer behavior is probably affecting inflation. Wages, though rising, have not kept pace with inflation, and households are now more selective in their spending, for example, favoring budget store brands over premium offerings.
In the weeks ahead, the Fed surely will continue to monitor inflation data, unemployment, and corporate earnings. Volatility may well persist in the stock market, at least through the end of this year. Investors should focus on industry leaders, with solid revenue, earnings, and cash flow records. A number of energy and drug companies fit the bill. – 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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