Prior to today’s trading bell, the futures market was suggesting a favorable open. There are not any new economic data releases scheduled until 10:00 a.m., when The Conference Board will report on its U.S. Leading Economic Index for the month of April. That research organization is expected to show a 0.3% monthly slide in domestic business, on a par with the March rate of decline. Such a result would be in line with economists’ read that the economy is losing momentum. Shortly after the board’s report, Federal Reserve Governor Christopher Waller will speak on the business situation and central bank rate policy.
The major stock market indexes look to wrap up this week with decent gains. Through Thursday’s close, the tech-weighted NASDAQ composite was up 2.2%, the broader Standard & Poor’s 500 index had advanced 1.4%, and the blue-chip Dow Jones Industrial Average had improved by 0.9%. On Wednesday, the indexes cemented a full recovery from April’s swoon, reaching respective records. Most visibly supporting share prices were Fed Chairman Jerome Powell’s comments that short-term interest rates, currently in the range of 5.25%-5.50%, were more likely to fall than to rise in the second half of this year.
Backing this rate policy likelihood was a cooler inflation report, by way of the Consumer Price Index, for April. Also positive for stocks, the recent measure of monthly retail sales was softer than expected. Cautious rate comments on the part of Fed Presidents Loretta Mester, John Williams, and Thomas Barkin, however, caused incremental pullbacks in the indexes on Thursday. These officials warned that rates could remain high for longer than many on Wall Street are anticipating. The general consensus on the Street now seems to be that the central bank will reduce rates 25 basis points by this coming September and, possibly, another 25 basis points late in the year. We concur that rates should be lower by yearend.
The ultimate rate level will be contingent on trends in inflation and, to a lesser, but still meaningful, extent, the direction of wages, unemployment, and corporate earnings. Next week, the Federal Open Market Committee will make public the minutes of its early May meeting. (The committee is scheduled to meet again on June 11-12.) In addition to this news, investors will parse the latest on existing and new home sales, initial jobless claims, durable goods orders, and consumer sentiment, as well as Standard & Poor’s ``flash’’ Purchasing Managers Indexes for the services and manufacturing sectors. Wall Street is hopeful that data will continue to support the belief that the economy is on track for a soft landing, that is, able to avoid a recession.
Should the Fed’s policy on short-term rates meet expectations, stock prices would probably move higher but, given the elevated average price-to-earnings ratios, gains might well be limited through the end of 2024. We think that only a resumption of rate hikes, which seems unlikely, would significantly pressure stock valuations. Serious geopolitical events remain a wild card, though. For now, with yields having declined, high-quality bonds are less competitive to equities. On balance, portfolio diversification, with a heavy helping of stocks in sector-leading companies with strong earnings and cash flows, appears most wise, at this time. – David M. Reimer
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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