Stock market futures point to a negative open to today’s trading activity. Early this morning, the U.S. Bureau of Labor Statistics (BLS) released import price index data for the month of March. The headline index displayed a 0.4% month-to-month advance, versus estimates for a 0.3% rise. Import prices also rose in January and February, following a period of declines. Adjusting for volatile fuel prices, however, the index fell 0.2% on the month of March and showed no change on a full year basis. The adjusted index increased 0.7% in the first month of this year and 0.2% in the second month. Inflation remains a concern for consumers, Wall Street, and the Federal Reserve. The easing trend in prices recently was disrupted, but seems likely to reestablish itself as 2024 unfolds.
Shortly, the University of Michigan will publish its preliminary reading on consumer sentiment for this month. Economists look for an improvement to 79.9 from 79.4 in the previous month. The February level was at 76.9. Sentiment has become more favorable, so far, this year. Later today, Atlanta Fed President Raphael Bostic and San Francisco Fed President Mary Daly will speak on the economy and Fed policy at separate events. Meanwhile, a new earnings season has begun, with the nation’s leading banks reporting earnings today. Share prices are reacting in a negative fashion.
Stocks have struggled this week. Share prices were little changed on Monday and Tuesday as investors awaited new inflation data in the form of the Consumer Price Index (CPI). At mid-week, the BLS reported the CPI gained 0.4%, on a monthly basis, stronger than what Wall Street was anticipating and on a par with the prior read. Year over year, the CPI was up 3.5%, above expectations and the February rate. The core CPI, ex food and energy prices, advanced 0.4% and 3.8%, month on month and year on year, respectively, ahead of estimates and steady with February’s pace. Investors were not happy with the news and sent stocks lower. The concern is that, with inflation proving resilient, the Fed might decide to implement fewer rate cuts than hoped for, and later this year, than expected.
On Thursday, stocks received a modicum of relief. The Producer Price Index (PPI) stepped up 0.2% in March and 2.1% year to year; these gains were below estimates. In reaction, the tech-heavy NASDAQ composite posted a 1.7% improvement for the day, while the broader Standard & Poor’s 500 index (S&P 500) rose 0.7% and the blue-chip Dow Jones Industrial Average closed with a slight loss. For all of this week, it looks as if the NASDAQ will be up modestly (less than 1%) and the S&P 500 and Dow might be unable to avoid losses (in the 1%-2% range).
At the start of 2024, analysts and economists were looking for six one-quarter-point reductions in the federal funds rate, which is currently at 5.25%-5.50%. They forecast a slowing economy and a visible decline in the inflation rate. That forecast has not fully panned out. The domestic economy is showing discernable strength and prices for goods and services remain elevated. Also, the employment situation remains fairly tight. Fortunately, wage growth has been rather tame, thanks, apparently, to immigration. A consensus is rising on Wall Street that the central bank may only reduce interest rates in one or two increments (25 basis points each) in the second half of this year, perhaps not starting until July. The Fed’s ultimate course of action will depend on incoming data. Investors will look for more clarity from officials’ public statements and, most importantly, Chairman Powell’s comments immediately following the coming April 30-May 1 Federal Open Market Committee meeting.
In the meantime, investors would do well to focus on the stocks of companies that are leaders in their respective industries and that are able to generate consistent earnings and cash flow growth. Portfolio diversification and a return to traditional investment weightings, that is, more inclusive of bond holdings and money market investments (to benefit from higher rates), appear in order. – 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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