Stock market futures have swung up and down before today’s opening.
This morning, the U.S. Bureau of Labor Statistics released its Producer Price Index (PPI) data for the month of November. That index showed a 0.3% month-to-month expansion, higher than economists’ expectations and level with the revised rate for October. On a positive note, though also higher than expected, year-to-year PPI growth figures were down from those of the prior month. The latest annualized PPI readings lend credence to the idea that the Federal Reserve’s inflation fighting strategy is meeting with some success.
Later today, investors will parse the University of Michigan’s consumer sentiment index and its survey on five-year inflation expectations. The former, though likely improving, probably stayed at a depressed level and the latter might come in little changed, at about 3%.
It appears that the major market indexes will be unable to avoid posting modest losses for all of this week. The Dow Jones Industrial Average has held up better than the Standard & Poor’s 500 and the NASDAQ in descending order. Strong recent employment data, disseminated on Friday, December 2nd, caused visible share-price stress, which carried into this week. Good news was generally bad for stocks. Early in the week, the Institute for Supply Management’s services index indicated stronger expansion, while factory orders and core capital equipment demand picked up. At mid-week, data showed continued labor cost growth, albeit at a slower pace, and higher consumer spending, as evidenced by increased credit card balances. Jobless claims ticked up, but essentially remained unremarkable.
Wall Street is anxiously awaiting the release of new inflation data. This coming Tuesday investors will see the latest Consumer Price Index measures for the month of November. Investors are rooting for a further slowing of price gains. That day, the Federal Reserve’s Federal Open Market Committee (FOMC) will start its two-day December meeting. On Wednesday, the FOMC will announce its decision on how much to raise the benchmark Federal Funds interest rate; market pundits are anticipating a 50-basis-point hike in short-term rates, to a range of 4.25%-4.50%, following four successive 75-basis-point increases. Currently, the consensus among economists and analysts is that the Fed will further lift rates into the first half of 2023, though probably in more-modest increments of 25 basis points. If the domestic economy continues to display resiliency, Chairman Jerome Powell may feel compelled to argue for keeping rates steady for most of next year. The higher rates could result in a recession.
We do not expect anything worse than a mild recession, should a downturn emerge. What would that development mean for equities? This year, technology stocks have taken it on the chin. Rising interest rates discount the future earnings of such growth issues, their main allure. Tech stocks typically trade at a premium to the broader market, as is currently the case; they are trading at an average multiple of share price to earnings-per-share of roughly 30. The broader market’s price-earnings multiple, now about 17, still appears to be somewhat higher than it should be, considering the likelihood of a softening economy in 2023. Thus, volatile growth equities may have to endure some additional price declines, while other types of companies could struggle to achieve meaningful gains. Too, recessionary conditions do not augur well for even the more staid financial issues, with banks reliant on loan originations to make money. During challenging economic times, the consumer staples and healthcare sectors usually perform best. China’s lingering battle against COVID-19, the Ukraine-Russia conflict, military posturing on the part of North Korea and others, and other political/economic matters add to overall uncertainty. For the time being, investors should stay with top-quality stocks in companies with solid revenue, earnings, and cash flow records.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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