Stocks look to open on a positive note at the start of trading today. New economic data points were fairly limited this week. For the month of September, the U.S. trade deficit grew to $61.5 billion from $58.7 billion in August, as imports outpaced exports; consumer credit rose 2.2% (to $4.977 trillion), versus a 3.8% decline in the previous month; wholesale inventories expanded by 0.2%; and initial jobless claims (for the week ended November 4th) came in at 217,000. This data supports general evidence that the economy is holding up well and the job market is resilient, in the face of elevated interest rates. A preliminary November consumer sentiment reading will be released shortly; expectations are for little change from the modest October level.
This week, several Federal Reserve officials gave talks on the central bank’s inflation-fighting strategy and trends in the domestic economy. Their comments did not stray very far from what Chairman Powell had been saying since the last Fed meeting early this month. In that meeting, and the previous September get-together, the Federal Open Market Committee decided to keep short-term interest rates steady at 5.25%-5.50%; rates have risen five points since March of 2022.
Wall Street is hoping that the Fed is done lifting rates in the current cycle. This assumption is borne out in the performance of stocks for much of this week. Indeed, Wednesday’s close marked the eighth-straight trading day of gains for the blue-chip Dow Jones Industrial Average (DJIA) and the broader Standard & Poor’s 500 (S&P 500) Index; the tech-weighted NASDAQ composite had scored nine consecutive days of improvement. Yesterday, however, share prices moved down in the 0.5%-1.0% range, as bond yields stepped up again. Fed Chair Powell emphasized that the door is open to another rate hike late this year or early next. He, along with other Fed officials, appears to favor keeping rates higher for longer than the Street had been expecting. Recent corporate earnings have been decent and the jobs market is still quite firm, as is consumer spending.; in that light the Fed could conclude that rates can stay high without risking a serious recession. Analysts are anticipating rate cuts by mid-2024, assuming more pronounced recessionary conditions take hold; a severe downturn is not expected.
The DJIA, S&P 500, and the NASDAQ may be hard pressed to record gains for this week. Notably, next week, investors will receive October data on the Consumer Price Index and the Producer Price Index. Though not guaranteed, should these indexes show a continued easing of inflation,that likely would be a positive for stock valuations. Typically, stocks rally in the final two, holiday-heavy, months of the year, fueled by favorable investor sentiment. That’s not a given for this year, but it seems to be what Wall Street expects. Barring any significant negative news, we would not be surprised to see share prices move up from here to yearend.
This year aside, prospects for 2024 stock performance appear more muted. Though we don’t expect it, the jobs market could stay exceptionally tight and consumer spending could remain quite strong, potentially reigniting cost pressures and pushing the Fed to redouble its inflation-containment efforts. What’s more likely to happen is that inflation and elevated interest rates continue to weigh on consumer and business spending. Gross Domestic Product will probably slow. Recessionary conditions could mount, prompting the Fed to begin to trim the federal funds rate. Under such a scenario, it’s conceivable that share prices would post advances, though probably not as great as what will probably be recorded for 2023. Political and military conflict in the world, especially in the Middle East and between Russia and Ukraine, present a good deal of uncertainty. As we have recommended previously, portfolio diversification is paramount. – 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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