Stocks appear on track for a mixed open to today’s trading, based on the futures market. There are no key data reports scheduled prior to the bell, but investors will get a preliminary reading on consumer sentiment for the current month from the University of Michigan at 10:00 a.m. (eastern). That gauge is expected to rise slightly to 71.0 from the final level of 70.5 in October. Consumer sentiment has been recovering from a low of about 50.0, hit in the summer of 2022, in a halting manner. The latest measure likely will remain well short of the high of just over 100 reached in early 2020, before the coronavirus pandemic struck the population and the economy. Later today, markets will hear from Federal Reserve Governor Michelle Bowman and St. Louis Fed President Alberto Musalem. They may well reiterate central bank Chairman Jerome Powell’s comments made yesterday.
Mr. Powell announced that the Federal Open Market Committee (FOMC), in its meeting this week, decided to cut short-term interest rates by one-quarter of a percentage point, to 4.50%-4.75%. This move follows a 50-basis-point-reduction in September. The Fed Chairman stated that the U.S. economy remains on a solid footing, inflation is coming under control, and the employment sector is firm. Though there’s no guarantee, additional rate cuts seem likely, probably in one-quarter-point increments, at each FOMC meeting over the next several months. Such a scenario, however, is dependent on new data points confirming general stability in the broader economy. We would not be surprised to see the federal funds rate fall to the mid-3% range by 2026. Stocks reacted positively to Mr. Powell’s latest remarks.
For all of this week, it looks as if the major U.S. market indexes will post decent gains. Through Thursday’s close, the tech-heavy NASDAQ was up 5.7%, compared to advances of 4.3% and 4.0% posted by the Standard & Poor’s 500 and the Dow Jones Industrial Average, respectively. The three indexes have traded up to new records. Investors are optimistic on corporate earnings, inflation, employment, and the Fed’s course of action. Too, the election of Donald J. Trump as our next President has lifted valuations. It’s expected that Mr. Trump will reduce government regulation and cut corporate taxes. Still, there is some concern that his promises to raise tariffs on imported goods could reignite inflation. Additionally, deficit spending poses the risk of higher Treasury bond yields, raising the benchmark for borrowing, especially in the housing sector.
Next week, new economic information on the consumer price index, producer price index and, among other data points, initial jobless claims will be reported. The aftermath of Hurricanes Helene and Milton will probably have an influence, sustaining volatility in the numbers. Even so, we don’t expect any outsized divergence from recent favorable trends. In our view, the domestic economy is on course for a soft landing, with no recession.
President Trump’s policies likely will diverge significantly from those of President Biden. What raises a good deal of uncertainty is whether he can push coveted legislation through a divided Congress. Also, in the meantime, he will need to deal with serious geopolitical matters. Any missteps, though not now apparent, could hurt the economy and stock prices. We note that the markets are trading at elevated multiples, presenting more downside risk to investors in the event of bad news than upside potential on good news. On balance, stocks do look to post incremental gains to yearend. That said, portfolio diversification is most prudent at this time. – David M. Reimer
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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