This morning, the attention of Wall Street was on the April personal income and spending report from the Labor Department, which was released at 8:30 A.M. That was because the report contained the latest Personal Consumption Expenditures (PCE) Price Index reading, which is the assessment of inflation most closely watched by the Federal Reserve. The report showed the PCE and core PCE Indexes, the latter of which excludes the more volatile food and energy components, rose 0.3% and 0.2%, respectively, in April. On a 12-month basis, the PCE and core PCE increased 2.7% and 2.8%, respectively.
The PCE data showed little improvement in inflation last month, which likely suggests that the Federal Reserve will continue to keep rates high for longer. Following the report—which also showed that personal incomes increased 0.3% last month, while personal expenditures declined 0.1%--Treasury market yields fell slightly and the equity futures are presaging a modest rally for stocks when trading kicks off stateside.
Leading up to today’s PCE data and the final trading day of May, the major equity averages were struggling during this holiday-shorted trading week. The selloff pared a portion of the gains that were recorded by the Dow 30, NASDAQ Composite, and the broader S&P 500 Index during a month that has historically not been a good one for stocks.
Pushing the major averages lower the last few trading sessions were the minutes from the early May Federal Open Market Committee (FOMC) meeting and the latest Federal Reserve Beige Book summation of economic conditions. In a nutshell, these reports showed that inflation remains stubbornly high and a major concern for the central bank. They also showed that the pace of economic growth is slowing, and the labor market is showing some signs of weakening. This economic picture was confirmed by the latest revision to the first-quarter gross domestic product (GDP) estimate, which was reduced from 1.6% to 1.3%.
These three economic conditions occurring at the same time can often bring concerns about stagflation, but the Federal Reserve doesn’t seem to be worried about that possibility right now. Instead, the more-hawkish tone from the Fed has pushed the hopes of an interest rate reduction further out into the future, which has driven Treasury market yields higher and fueled some profit taking in an equity market that was at or near record highs entering the week. A weak auction for government-issued Treasury securities on Tuesday also put some upward pressure on yields.
The earnings news of the last few days has been mixed, if not uninspiring. Weak prognostications from customer resource management software maker Salesforce (CRM) after the close of trading on Wednesday and a bad performance from its stock was responsible for the lion’s share of yesterday’s 330-point decline for the Dow Jones Industrial Average. The news was also not good for technology company UiPath (PATH) either, and its shares tumbled yesterday. This, along with the noted recent move higher in Treasury yields, resulted in the worst trading day for the NASDAQ Composite in May.
Since the close of trading last night, there was a batch of notable earnings news. Computer company Dell Technologies (DELL) beat expectations, but its stock, which ran up into the quarterly release, is trading notably lower on softer-than-expected guidance in what was likely a case of “buy on the rumors, sell on the news.” Likewise, shares of MongoDB (MDB) are trading sharply lower after the provider of worldwide database platforms reduced its forecast for the full year. Conversely, shares of cloud security company Zscaler (ZS) are trading higher in pre-market action after the company beat forecasts on both the top and bottom lines and raised its guidance. In the retailing sector, shares of department store Nordstrom (JWN) are lower, while the stocks of Ulta Beauty (ULTA) and the Gap (GPS) are higher, with the latter’s sharp move to the upside in extended hours trading fueled by the apparel company’s better-than-expected results and outlook.
In general, first-quarter earnings season was a successful one for Corporate America and that has provided needed support for stocks amid uncertainty about inflation and its implications for the Federal Reserve. It should be noted that with equity averages entering the week at or near record highs, those companies that failed to deliver positive results or guidance have been punished by Wall Street. Given this backdrop, we continue to recommend the stocks of quality companies that have a history of generating steady earnings and cash flow growth. These companies are less likely to post results that will feel the full wrath of Wall Street. - William G. Ferguson
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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