Stock futures indicate an extended uptrend on this Veterans Day holiday, when equity markets will be open but there’s no trading in U.S. Treasury securities. In the wake of yesterday’s key inflation and employment reports, the only significant data points coming out today are the University of Michigan’s November gauge of consumer sentiment and its survey of consumer inflation expectations for the next five years. Another large move in share prices does not seem likely in this week’s final trading day.
On Thursday, stocks surged higher on the news of a slackening in both the Consumer Price Index (CPI) and Core CPI (exclusive of volatile food and energy prices). Recent jobless claims figures were generally in line with what Wall Street was expecting. The blue-chip Dow Jones Industrial Average advanced more than 1,200 points (3.7%), while the broader Standard & Poor’s 500 (S&P 500) gained over 200 points (5.5%) and the tech-focused NASDAQ jumped 760 points (7.4%), their best respective one-day performances since the spring of 2020. All 11 of the S&P 500 sectors moved higher. The cooler inflation reading, along with a 7.7% decline in the 10-year bond yield, sparked the rally in NASDAQ stocks. Alphabet (GOOG), Apple (AAPL), and Microsoft (MSFT) posted share-price increases in the high single-digits, and Amazon.com (AMZN) advanced more than 12%. Rising stocks outnumbered decliners by about six to one.
Just prior to the Federal Reserve’s mid-December meeting, the markets will get another read on the CPI and the employment trend. Investors are hopeful of a further cooling of inflation. Economists seem to think that the Fed is more likely to next raise short-term interest rates by one-half of a percentage point in its fight against rising prices, rather than an aggressive three-quarters-of-a-point hike. Indeed, a few central bank officials have hinted that this may be the case. It’s possible that there may be a pause in rate hikes after January, so the Fed can observe what impact its strategy is having. A few academics have argued that the headline inflation numbers do not accurately reflect how much inflation is now receding. They say there is a lag effect in the Fed’s data, particularly with regard to easing home price and apartment rental inflation.
Through most of 2023, it seems likely that the Federal Funds rate range may peak near the 5.0% mark. A pivot by the central bank, that is, rate cuts, does not appear in the cards anytime soon, unless the economy takes a turn for the worse. Investors, as well as the Fed, surely will keep a close watch on the next corporate earnings season beginning in January. Assuming that the Fed maintains a tight rein on inflation, it’s probably too early to recommit to technology stocks. (Higher inflation discounts the future earnings of these equities.) Though tech stocks have taken a drubbing this year, traditional value issues (e.g., the Dow components) are generally trading at comparatively less multiples. We advise investors to stay with well-established sector leaders, in particular, financial, industrial, and energy companies that are generating strong revenues, earnings, and cash flows. — 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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