The stock market will begin the abbreviated final trading week of March on pace to make it five-consecutive winning months. A good deal of the buying came last week when more-dovish-than-expected commentary from Federal Reserve Chairman Jerome Powell after the conclusion of the March Federal Open Market Committee (FOMC) meeting was greeted positively by investors. This morning, the equity futures are pointing to a modestly lower start after a mixed performance on Friday that included the Dow Jones Industrials falling 306 points, but the tech-heavy NASDAQ Composite finishing 27 points higher, and at an all-time peak. This week in stateside stock markets will end Thursday, as the exchanges are closed on March 29th for Good Friday.
The FOMC left the federal funds rate unchanged at 5.25% to 5.50%, but Fed Chairman Powell also reaffirmed—despite inflation climbing modestly during the first two months of 2024—that the central bank will likely pivot toward lowering interest rates at some point later this year. Perhaps as early as the June FOMC meeting, the Fed could begin reducing the benchmark short-term interest rate, with its current 2024 federal funds rate target at 4.60%. Mr. Powell’s remarks put mild downward pressure on Treasury market yields and fueled another move higher in the equity market. There is some dissent inside the Fed, however; for example Atlanta Federal Reserve Bank President Raphael Bostic said Friday he expects just a single quarter-point interest rate cut this year instead of the two he had previously projected, citing persistent inflation and stronger-than-anticipated economic data. Still …
The Federal Reserve statement and Chairman Powell’s remarks were the perfect cocktail for equity investors last week, with all three of the major equity averages hitting record highs. In addition to not walking back on the notion that the central bank will begin cutting rates later this year, the Fed raised its GDP growth forecast for 2024 from 1.4% to 2.1%. The solid growth outlook eased concerns that the lead bank will remain too restrictive for too long and push the economy into recession. The Fed’s better near-term outlook for GDP growth gave a boost to the economically-sensitive equity groups late last week, with interest in the industrial, materials, and energy sectors gaining steam.
In the corporate world, news broke this morning that Boeing CEO Dave Calhoun will step down at the end of this year, as the aerospace company has dealt with a number of production and quality control issues this year. Shares of the struggling jet producer are trading higher in pre-market action on this news. Meanwhile, we also learned today that Apple (AAPL), Alphabet (GOOG), and Meta Platforms (META) are being scrutinized by the European Union under a new law that can see anticompetitive behavior met with fines of 10% of global revenue. Shares of all three technology behemoths are nominally lower in extended hours trading.
This week will bring a number of important economic releases, including the report on February new home sales a half-hour into today’s trading session. Then tomorrow, we will get the report on February durable goods orders and the latest consumer confidence reading from the Conference Board. Both reports will be closely monitored for any signs of fatigue in the consumer sector, which has powered the economy since the end of the COVID-19 pandemic. Thursday brings another reading on initial unemployment claims and the final revision to fourth-quarter 2023 GDP estimate. The week’s biggest report will come on Friday morning when the Labor Department releases data on February personal income and spending.
In the personal income and spending report, investors will be focused on the Personal Consumption Expenditures (PCE) Price Index, which is the assessment of inflation most closely monitored by the Federal Reserve. The expectation is that the PCE data will show some uptick in inflation, given the hotter-than-expected readings on February consumer and producer prices. If the increase is deemed modest, we don’t think it will change the Fed’s outlook on inflation and monetary policy. Overall, the central bank seems to have managed its goal of allowing economic growth to continue, while gradually getting inflation under control.
As the month of March draws to a close this week, equity market valuations are looking frothy following the conclusion of earnings season. It should be noted that the stock market has not witnessed a pullback of 3% over the last 100 days, which, along with the CBOE Volatility Index (or VIX) trading just above 13, clearly suggests that the market is overbought. Still, we think the old adage “don’t fight the Fed” holds. That is, with the economy doing well and the Federal Reserve poised to lower interest rates, earnings and optimism should continue on a positive trajectory. In this environment, we recommend a portfolio headlined by high-quality stocks that can withstand volatility in the market or the impact of uncertain global events. – William G. Ferguson
At the time of this article’s writing, the author held positions in none of the companies mentioned.
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