Stock futures markets set up for a positive opening to today’s trading. Shortly, investors will see updated February readings on the domestic services sector from the Institute for Supply Management and S&P Global. Economists are generally expecting a modest easing in the sector’s growth trajectory. Later this morning, Dallas Federal Reserve President Lorie Logan will present her view on the current economic environment and the central bank’s likely near-term path in its inflation-fighting strategy. Her thoughts will be followed by those of Fed Governor Michelle Bowman this afternoon. We don’t anticipate any wide swings in share prices to the end of the trading day.
Share prices, as a whole, look to post an incremental gain on the order of 1% for all of this week. Over the past few days, investors saw that, in January, durable goods orders declined, pending home sales perked up, retail inventories rose slightly, wholesale inventories fell slightly, and construction spending mildly contracted. Also, for December, house price inflation further moderated. February data showed a continued softening of U.S. manufacturing and fewer jobless claims. Fourth-quarter 2022 productivity improved, while unit-labor costs tracked higher. During the week, share prices rose and declined as the data became public. Yesterday, prices were supported by Atlanta Fed President Raphael Bostic’s comments that the central bank does not need to raise short-term interest rates more than one-quarter of a percentage point at a time. A positive earnings release from Salesforce, Inc. (CRM), provider of customer relationship management solutions, lent support to the indexes, as well.
For the year to date, the tech-heavy NASDAQ Composite is holding on to a near-11% gain and the broader Standard & Poor’s 500 Index is up just over 4%, while the blue-chip Dow Jones Industrial Average (DJIA) has posted a fractional decline. It’s also worth considering that the small cap Russell 2000 is performing fairly well this year, being up about 8.7%. Subscribers may want to weigh the fact, however, that the DJIA has gained on these other indexes in the past two weeks.
Wall Street is anxiously anticipating January and February jobs data due out next week. The Federal Reserve is scheduled to meet from March 21st to March 22nd, and will decide on its next interest rate move, largely expected to be another one-quarter of a point hike, to a range of 4.75%-5.00%. Helping in the Fed’s decision, aside from the jobs data, will be new information on the Consumer Price Index (CPI). We would not be surprised to see sustained strength in the employment sector and a further modest softening in the CPI numbers. Lately, anecdotal private enterprise data indicates that demand for employees is beginning to soften; government readings typically lag this data by roughly one month. As well, corporate managers are reporting that consumers are trading down to lower-cost goods and services.
As stock trading progressed in the month of February and into March, it appeared that Wall Street was coming to terms with the likelihood that the Fed will raise short-term interest rates higher (to above the 5% mark), and hold them there for longer (to year end), than was previously expected. Share-price momentum has slackened. In the quarters ahead, we believe the U.S. economy will prove resilient, and consumers and businesses should be able to withstand higher, though not especially onerous, borrowing rates. As 2023 unfolds, inflation could well decelerate, as earlier Fed actions have their effect. Real interest rates (i.e., net of inflation) might increase, prompting the central bank to take a pause in its strategy this summer, and potentially begin to cut federal funds rates in 2024. Such a scenario would be supportive of stock valuations. For now, investors would do well to follow our suggested portfolio asset allocation model of 55% equities (with a weighting toward large-cap defensive issues), 10% high-quality bonds, and 35% cash. – David M. Reimer
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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