Stock trading looks to open in a mildly negative manner today, based on the futures market. Early this morning, the U.S. Bureau of Labor Statistics released January data on import prices. Those prices rose 0.3%, in line with economists’ estimate and stronger than the prior-month advance of 0.1%. Adjusting for volatile fuel prices, the index stepped up 0.1%, matching the increase in December; the experts had expected no change. Year over year, headline price momentum moderated to 1.9% from 2.2%. This data adds to information on inflation that was released earlier in the week (more below).
At the same time the import data came out, the Census Bureau announced its measure of domestic retail sales for last month. That measure depicted an unexpected 0.9% decline, compared to an anticipated two-tenths of a point step-down. Excluding the auto sector, sales slipped 0.4%, short of the outlook for a 0.3% expansion. On a positive note, both headline and adjusted sales growth measures for December were revised up, to 0.7%, versus 0.4% previously. Not surprisingly, elevated prices for goods and services are having a negative impact, albeit, thus far, subdued, on consumer spending budgets.
As we release our comments on today’s pre-market activity, investors will see the latest on industrial production and capacity utilization from the Federal Reserve Board. Production in January likely slowed to a 0.3% expansion rate from a stronger pace of 0.9% in December. Capacity utilization may well have ticked higher, to 77.7% from 77.6% previously. Also later this morning, Wall Street will get a read on domestic inventories, expected to indicate a 0.1% contraction in the final month of 2024; conversely, inventories rose 0.1% in November.
The data rolling out today generally backs the consensus view on the Street that the U.S. economy remains healthy, notwithstanding persistent inflation. Corporate earnings for the current reporting season, now nearing conclusion, have displayed continued positive momentum, overall. True, shifting plans on tariffs announced by President Trump have led to uncertainty, prompting many business managers to hold back any major investment or expansion initiatives, but they are still spending to meet clear demand requirements, when needed. Encouraging are the heavy outlays on artificial intelligence systems planned by the leading technology companies, even in the face of potential heightened competition from peers in China.
At mid-week, the Bureau of Labor Statistics presented inflation numbers for the first month of 2025. Its Consumer Price Index exhibited renewed strength in inflation, pressuring share prices. Too, the Producer Price Index did not show any hoped-for slackening in cost momentum. Concern has mounted on Wall Street that the Federal Reserve will pull back on cutting short-term interest rates this year. The federal funds rate is 4.25%-4.50% and may be nearer the “neutral” level (i.e., without an expansionary or restrictive impact) than many had previously thought. The odds that the Fed will only cut rates by another 25 basis points, if at all, this year have risen; just a few weeks ago, total cuts of 50 basis points were widely anticipated.
A recent somewhat softer tone on tariffs supported stock values as this week rolled on. The major stock indexes seem poised to achieve gains of 0.5% to 1%. Market volatility has yet to be a concern.
Still, if President Trump significantly raises import tariffs and is able to deport a substantial number of illegal immigrants, that could result in accelerated inflation, which would probably push the Fed to not cut rates or even consider increasing them once again. Mr. Trump’s economic advisors believe that less government regulation and lower taxes would boost economic activity, offsetting the stresses from inflation and bringing in more tax receipts to help to balance the federal budget. This reasoning could prove overly optimistic. That said, we suspect the administration would react quickly to any shortcomings in its strategy.
All considered, we reiterate our call for investors to sustain a core of stable, cash-flow generating, large-cap equities in their individual portfolios. Limited exposure to good-quality small- and mid-cap issues is probably a good idea, lending an element of extra growth potential, if all goes well. - 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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