The futures market implies a positive open to today’s stock trading. This morning, the U.S. Bureau of Economic Analysis released important data for the month of January. The Personal Consumption Expenditures (PCE) price index posted a gain of 0.3% last month, on a par with both the economists’ consensus expectation and the December pace. Year over year, the price index advanced 2.5%, matching the outlook and below the previous rate of 2.6%. Excluding the volatile food and energy components, the PCE index was up 0.3% in the month and 2.6%, year on year, relative to the December rates of 0.2% and 2.8%, respectively.
Inflation continues to rise at a faster pace than the Federal Reserve’s targeted 2.0% growth. This reinforces the wide Wall Street assumption that the central bank is unlikely to cut short-term interest rates before mid-2025. The federal funds rate is currently 4.25%-4.50%. An increasing number of experts believe the Fed probably won’t reduce rates by more than 25 basis points this year, if at all. Fed officials are closely monitoring domestic employment, which is healthy, for now, and the inflation effects of President Trump’s announced tariffs on imported goods.
Additionally this morning, investors got a read on personal income and personal spending levels, also for January. Income improved a strong 0.9%, in relation to the prior-month gain of 0.4%. Spending, however, slipped by 0.2%, versus the 0.7% increase in the final month of 2024. While their income has mostly risen, consumers are becoming more cautious about household budgeting. Like economists, they too are concerned about the potential effects of higher tariffs.
The Federal Reserve next meets March 18-19 to decide on whether to make any changes to monetary policy. We believe the federal funds rate will be held steady. Next week, data on the manufacturing and services sectors, auto sales, employment and, among other measures, construction spending will stream in for the Fed’s review.
For all of this week, the blue-chip Dow Jones Industrial Average, broader Standard & Poor’s 500 and the tech-weighted NASDAQ are all on track to suffer losses. The current earnings season is now wrapping up, and it showed strong growth versus last year. Still, more and more investors are concerned whether the economy can extend its solid growth record. Low- and middle- income households are cutting back on spending, and companies are cautious about investing in expansion. That’s on top of the uncertainty surrounding tariffs and the prospects of further cuts to short-term borrowing rates.
We believe the Trump Administration will keep a close eye on the impact of its policies related to deregulation and import tariffs. They likely will try to adjust quickly to any miscues. Also, Congress may temper any overly aggressive actions. We are cautiously optimistic that the major stock market indexes can achieve incremental gains this year, probably well short, though, of the robust performances scored in 2023 and 2024.
In the meantime, we advise investors to focus on stable large-cap equities in industry leaders that are generating strong cash flows. – 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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