This morning, the attention of Wall Street was on the March Consumer Price Index (CPI) report, which will be closely monitored by the Federal Reserve for clues about inflation on the consumer level. At 8:30 A.M. (EDT), the Department of Labor reported that the CPI rose 0.1% on a month-to-month basis, which was below expectations. The core-CPI, which excludes the more volatile food and energy components, climbed 0.4%, matching the consensus forecast, but also was down from the previous month. On a 12-month basis, the CPI and core-CPI jumped 5.0% and 5.5%, respectively. Although these increases are still considerably higher than the Federal Reserve’s comfort level, they do show that the central bank’s goal to lower inflation is working and it may give the bank more wiggle room at the upcoming monetary policy meeting.
Wall Street liked the CPI report, and the equity futures, which were slightly higher leading into the CPI data, took a sharp step up following the more-benign consumer price figures. The Dow, S&P 500, and NASDAQ futures are all up more than a half-percentage point, with NASDAQ futures leading the way higher. Treasury market yields fell sharply on the inflation report.
The major equity averages traded in a tight band in the days leading up to the inflation data. The March employment data, which raised sentiment that the Federal Reserve would hike the federal funds rate by another quarter point, to 5.00%-5.25%, at next month’s Federal Open Market Committee (FOMC) meeting, did not bring a major reaction from Wall Street. We think that is because there is a lot of inflation data to be released in the coming weeks, including today’s CPI figures, that will ultimately determine the central bank’s next monetary policy moves. The minutes from the March FOMC meeting (schedule to be released at 2:00 P.M. (EDT) today) also will provide more insight into what Federal Reserve policymakers are thinking.
Today’s more benign inflation data should be welcome news for the Fed, which may find itself between a rock and a hard place in its attempt to tame inflation. The central bank still needs to bring prices, which are running well above the lead bank’s target level of 2%, down and that alone would suggest that more work needs to be done and further tightening should be expected. However, the Fed must guard against over-tightening and pushing the economy into recession. The inverted Treasury market yield curve suggests that a recession is near and weakening economic data of late, including declines in manufacturing activity, slowing nonmanufacturing (services) activity, drops in retail sales and durable goods orders, are giving credence to the notion that growth is slowing. If the Fed were to overstep on the monetary tightening front it may make for a harder landing for the economy. The fast-approaching first-quarter earnings reporting season will provide some more insight into how Corporate America and the consumer is doing in the higher borrowing cost environment.
So what are investors to do in this challenging environment, where there is so much uncertainty about the impact of the Fed’s monetary policy decisions on inflation and the overall performance of the U.S. economy? We continue to recommend exercising a good deal of caution. A portfolio consisting of high-quality companies, shorter-duration bonds, and a healthy amount of cash would be a good model to follow. On the equity side, we would focus on companies that have demonstrated an ability to generate steady earnings and cash flows during difficult economic times and maintain their dividend payments. The stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line include a vast array of companies. Historically, these issues have outperformed the broader market during extended periods of volatility. Our actively managed Conservative Large Cap Portfolio is updated weekly and highlights 20 stocks that are ranked either 1 or 2 for Safety. - William Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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