We look for a weak open to today’s stock trading, based on the futures market. This morning, Standard & Poor’s (S&P) and the Institute for Supply Management (ISM) will release their respective measures of the health of the U.S. manufacturing sector for the month of February. The readings seem likely to show further softness in the sector. Investors also will be parsing new data (January) on construction spending, anticipated to display an easing in growth, and the University of Michigan’s latest consumer sentiment number (February), which might not change much from the prior uninspiring, though improved, level of 79.6. As this day unfolds, several Federal Reserve officials will be speaking on the economy and interest rate policy.
Stocks appear on track to conclude this trading week on a flat note. Over the course of the week, new home sales advanced some, pending home sales growth moderated, the S&P Case-Shiller home price index continued to move upward, durable goods orders declined, consumer confidence softened a bit, and fourth-quarter 2023 gross domestic product (GDP) was revised downward by one-tenth of a percent to a still-solid 3.2%.
For most of this week, Wall Street, hoping for further indications of slowing inflation, was eagerly awaiting the release of personal consumption expenditures (PCE) price index figures for January. The Street mostly got what it wanted. Core PCE, which strips out volatile food and energy prices, did show a more paced rise. This should give the Federal Reserve more comfort in cutting short-term interest rates during the second half of 2024. A greater number of investors are now expecting three one-quarter percentage point reductions in the federal funds rate (5.25%-5.50%), as Fed officials have been suggesting, beginning in June. Such a scenario, though not as supportive as investors had been looking for earlier, likely would help the domestic economy to avoid recession.
We also note that, on Thursday, reported personal income rose strongly, while personal spending growth weakened. That implies consumers have taken a bit of a breather, deciding to rebuild some savings. Elevated interest rates have placed pressure on household budgets. Though spending on services has proven resilient, consumers have been more discerning with regard to their purchases of goods, lately. For the remainder of this year, economists are forecasting that GDP will hold in the solid 2.5%-3.0% range.
The central bank’s strategy on fighting inflation, while supporting favorable levels of employment, remains dependent on incoming economic data. Next week, the Fed and Wall Street will be monitoring updates on factory orders, wholesale inventories, productivity, the services sector, consumer credit, and employment. We are not expecting any outsized surprises, but that, of course, is not a certainty. The Fed next meets to deliberate on its strategy on March 19-20.
Thus far this year, the major market indexes are performing well. That’s impressive, given the strong gains achieved in 2023. The tech-heavy NASDAQ composite, rising more than 7%, has reasserted its leadership, followed closely by the broader Standard & Poor’s 500 index, up 6.8%. Blue-chip Dow Jones Industrial Average issues have lagged behind, but have appreciated 3.5 percentage points, as a whole.
Political hotspots in the world are worth watching, given their potential to disrupt the economy. We advise investors to hold significant weightings of well-heeled, cash generating corporate leaders in the tech, financial services, healthcare, and industrial sectors. – 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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