Early this morning, the futures markets pointed to a weak open to today’s stock trading. Key economic data for the month of March has been released. The Bureau of Labor Statistics reported a 1.2% increase in the quarterly employment cost index, greater than economists’ estimates and the prior-month pace. Another government agency, the Bureau of Economic Analysis (BEA) announced personal income rose an incremental 0.3% and personal spending was flat, the former holding at a steady pace, and the latter suspending its growth trend.
In a highly anticipated release, the BEA stated that its personal consumption expenditures (PCE) price index showed a 0.1% month-to-month expansion and a 4.2% year-over-year gain. The core PCE, which excludes volatile food and energy prices, and is a gauge closely watched by the Federal Reserve, was up 0.3% and 4.6% on a monthly and yearly basis, respectively. These readings show that inflation continues to ease. Shortly, research group, The Conference Board, will unveil its final April read on consumer sentiment, which has shown some resiliency. On balance, it seems that stocks will have some trouble finishing today on the plus side.
The major domestic stock market indexes look to complete this week on a flat note. Prices swung a bit over the course of the week, given mixed economic news and March-quarter corporate earnings reports. More specifically, with regard to the economic data, new home sales and prices advanced due to low inventory levels, pending home sales declined, durable goods orders gathered momentum, U.S. gross domestic product for the first quarter was softer than expected, and jobless claims stepped down.
On the earnings front, most visibly, regional lender First Republic Bank (FRC) reported weak revenues and income, as well as a further deterioration of its deposit base. Shipper United Parcel Service (UPS) cautioned investors about slowing macroeconomic conditions. Conversely, Facebook parent Meta Platforms (META) turned in a strong top- and bottom-line performance. Tech giants Alphabet (GOOG), owner of Google search engine, and Microsoft (MSFT), one of the leaders in software development, also beat Wall Street expectations. Too, the results of fast-food purveyor McDonald’s (MCD) and beverage & snack maker PepsiCo (PEP) showed firm demand for their offerings. Additionally, online retailer Amazon.com (AMZN) outperformed, but voiced concerns about the cloud-computing market.
To date, almost one-half of the companies in the Standard & Poor’s 500 Index (S&P 500) have turned in operating results for the March quarter. Some 80% of those have beaten The Street’s estimates, but it should be noted that analysts’ estimates have been trending downward for several months. Lately, the tech-heavy NASDAQ has reasserted its leadership, after ceding it to the blue-chip Dow Jones Industrial Average (DJIA) over the past month. Year to date (as of April 27th), the NASDAQ is up 17%, while the S&P 500 has advanced 8% and the DJIA has increased 2%. In the remainder of this year, corporate earnings, consumer spending, employment levels, and inflation readings will surely influence share-price performance. Moreover, investors will closely monitor the health of banks and the inflation-fighting actions on the part of the Federal Reserve. The consensus is that the Fed will raise short-term interest rates one-quarter percentage point, to 5.00%-5.25%, at its meeting next week, and then take a pause.
We don’t think problems in the hobbled banking sector will weigh enough on the broader economy to cause a downturn matching the 2007-2009 financial crisis, but there are no guarantees. Investors should exercise caution, diversifying, with an emphasis on the high-quality equities of industry leaders. Individual portfolios also should hold cash and bonds, 35% and 15%, respectively, according to our asset allocation model. – 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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