According to futures trading, stocks look to open higher today. Still, the major domestic stock market indexes have tracked modestly lower, thus far, this week.
In recent days, new economic data have impacted share prices. Most visibly, softer Producer Price Index (PPI) figures early Tuesday pushed stock prices higher. Strong retail sales numbers released the next day, however, sent markets lower, as they indicated the economy remains fairly strong despite higher interest rates. Tepid jobless claims data, reported on Thursday, added to the selling pressure. Investors worry that sustained consumer spending and economic expansion will keep the Federal Reserve on an aggressive inflation fighting path, further raising short-term interest rates. Today, investors will get a read on existing home sales for the month of October; an easing of activity is expected as mortgage rates remain high. Also, leading economic indicators for the month will be unveiled. Economists look for this measure to show a continuing decline.
Over the past four trading days, the blue-chip Dow Jones Industrial Average has reassumed its lead over the broader Standard & Poor’s 500 and the technology-focused NASDAQ, but not in a decisive manner. In yesterday’s trading, stocks of home building companies displayed marked weakness, on a report of limited new construction. The utilities, transportation, consumer discretionary, real estate, and materials sectors also were visible underperformers. Only technology and energy stocks were able to eke out slight gains. Overall, on light volume, decliners outpaced advancers by almost two to one.
Looking ahead, the results of the mid-term elections point to a divided U.S. Congress. Wall Street likes such a situation, since prospects for major legislation impacting corporations are minimal. That suggests more stability in the stock market.
Though grabbing the headlines, we believe that stress in the cryptocurrency sector, brought on by the demise of exchange FTX, will not have a meaningful impact on equities, as a whole. Of late, share-price volatility has been relatively tame, but news from companies, good or bad, has the potential to produce significant swings in individual valuations.
Too, should tensions heighten in the political arena, especially in regard to matters surrounding the Russia-Ukraine conflict, Iran’s bellicose undertakings, North Korea missile development, and China’s posturing toward Taiwan, volatility could surge.
Meanwhile, officials of the Federal Reserve continue to provide their thoughts on economic trends, via various public forums, in an effort to be transparent on thinking within the institution, and to keep stock and bond markets reasonably calm. Prior to the upcoming mid-December meeting of its Federal Open Market Committee (FOMC), the central bank will parse new consumer price index and employment data. Even if inflation shows a further deceleration and employment softens, the Fed will probably remain on course, raising interest rates by another 50 to 75 basis points. Another one-quarter of a percentage point hike cannot be ruled out in January. Ultimately, the benchmark Federal Funds rate range could rise to about 5%. At this time, the Fed appears inclined to keep rates at an elevated level through most of 2023, unless the economy falters in a big way.
All considered, we reiterate our advice that investors continue to favor stocks of well-established industry leaders with strong sales, earnings, and cash flow records. - 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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