The futures market suggests a mixed open to today’s trading. Prior to the bell, investors reviewed October data on housing starts and building permits. Construction starts tallied 1.37 million, versus economists’ consensus expectation of 1.35 million and the previous month’s level of 1.36 million. New permits totaled 1.49 million, compared to an estimated 1.45 million and September’s read of 1.47 million. The data displayed improvement in the face of high real estate prices, elevated mortgage rates, and low inventories of homes for sale. Lately, borrowing rates have inched lower, but we suspect it may take a few years for housing supplies to rise more in line with demand. In the meantime, many would-be home purchasers have given up on owning their own place, deciding to spend on other wants (e.g., dining, personal services, travel).
Stocks look to wrap up this week on a solid note. Gains on the order of 2% seem likely. That’s largely due to slower inflation, as indicated by the October Consumer Price Index, released early Tuesday morning. The next day, Producer Price Index figures for the same month showed further indication of weakening inflation momentum. Thursday’s import price data provided additional confirmation of this emerging trend. Separately, a weak U.S. retail sales report for last month was partial evidence that the Federal Reserve’s inflation-fighting program is impacting the economy in a constructive way.
There is a broadening opinion on Wall Street that the Fed has completed its recent short-term interest-rate hiking series. The federal funds rate now stands at 5.25%-5.50%, some five points above where it was in early 2022. Wall Street’s attention has turned toward estimates of when the central bank will begin cutting rates. The smart money seems to be on a first cut in the spring, more specifically, in May. Apparently, commercial businesses and consumers, given the elevated cost of borrowing, are being more cautious, regarding their spending budgets. This may well reduce Gross Domestic Product growth to roughly 1%-2% in the final quarter of this year from the strong 4.9% pace reported for the September quarter, as a number of leading economists predict. These prognosticators appear to anticipate continued low-single-digit expansion for much of 2024; hence the heightened outlook for rate cuts.
Considering the seemingly changing interest-rate environment, Treasury bond yields have moved down from recent highs of close to 5.0%. That’s given a nice lift to equities. The mood on the Street is brightening, and an increasing number of market pundits and analysts are predicting positive overall share-price momentum to yearend. It seems expected capital gains in 2024 do not match this year’s likely good showing, however. Through Thursday’s close, the NASDAQ, Standard & Poor’s 500, and Dow Jones Industrial Average were up approximately 35%, 17%, and 5%, respectively.
Despite the optimism, there is cause for caution. Consumer budgets are feeling pressure from higher borrowing costs, peoples’ savings are declining, and reliance on credit-card debt is rising. Corporate sales growth is slowing, and earnings improvement is becoming more dependent on cost-cutting measures. More and more economists are becoming confident that a recession can be avoided in 2024. That’s not a given, especially in light of the looming risks associated with corporate debt rollovers, particularly in the stressed commercial real estate sector, and the potential negative impact on the banking industry. Too, though we don’t expect it, a possible reacceleration of inflation, conceivably prompted by broader political conflict in the world or a macroeconomic “black-swan” event, could push the Fed back into an aggressive rate-hiking mode. On balance, weighing the many probabilities, we suggest that investors incrementally shift portfolios in favor of equities, versus cash and bonds. - David M. 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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