Stock futures point to a slightly positive opening today. Important economic data was released early this morning. The Bureau of Economic Analysis reported that the Personal Consumption Expenditure Price Index, a key inflation measure monitored by the Federal Reserve, was 6.3% in April, versus one year ago. This was down modestly from the 6.6% rate of the previous month, but still very strong. Personal income advanced 0.4% in April, a bit below the 0.5% improvement expected by economists. Rising wages continue to lend support, albeit less so, to household finances. Consumer spending posted a 0.9% gain for the month, compared to expectations for a 0.7% increase. Higher prices and healthy demand for services kept spending levels elevated. Taken as a whole, the data were generally in line with what Wall Street was anticipating. At 10:00 a.m., the University of Michigan will provide another data point, releasing its final measure for the May Consumer Sentiment Index; it’s expected to hold steady at a modest reading of 59.1 (the five-year high is 101).
The major market indexes closed higher on Thursday, supported by good news from retailers. Macy’s (M), Williams-Sonoma (WSM), Dollar Tree (DLTR), and Dollar General (DG) all turned in sales and earnings for the latest quarter that beat analysts’ estimates. Macy’s stock rose 19%, while William-Sonoma, Dollar Tree, and Dollar General increased 13%, 22%, and 14% in share price, respectively. Also noteworthy, tech stock NVIDIA (NVDA) added 5% in value, even after it had provided soft second-quarter guidance during its first-quarter earnings call on Wednesday. Analysts reiterated positive stock recommendations on the developer of graphics and processing technology used in several applications, most prominently gaming and data centers. Another tech stock, Broadcom (AVGO) advanced nearly 4%. The semiconductor device maker announced a sizable $61 billion deal to acquire virtualization software solutions company VMware (VMW). If the Dow Jones Industrial Average, Standard & Poor’s 500, and the NASDAQ can post gains today, this would mark the first week of positive performance since the start of a market slide in April.
There’s no certainty that stocks have bottomed, but it seems that we are now much closer to the end of the current market malaise. Most companies have announced March-quarter results and, essentially, the negative earnings news impacting share prices is already out. Inflation readings for the remainder of 2022 will probably show that prices have peaked, given comparisons against the high levels of 2021. Early indications have materialized that the Federal Reserve’s rate strategy is having an effect on the economy. Consumers appear to be shifting their spending from premium to budget products, particularly with regard to basic items used daily (e.g., grocery and personal care offerings). That is freeing up cash for certain desired discretionary spending (work clothes, and restaurant, concert, and movie theater visits). Both consumer and business spending seem strong enough to keep the economy from tipping into stagflation (a period of high inflation and no economic growth) or a severe recession. The Federal Reserve is guiding that it will raise short-term interest rates by one half of a percentage point at each of its June and July meetings. We believe Wall Street is pricing this, and additional one-quarter point hikes, beginning in September, into stock valuations. Any negative surprises, though, could hurt share prices. At this juncture, investors are prudently favoring high-quality dividend-paying equities.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
