U.S. stocks look to open in a negative fashion at the start of today’s trading. Shortly following the bell, investors will get June readings on Standard & Poor’s (S&P) flash services and manufacturing purchasing managers’ indexes. Expectations on Wall Street are for moderately softer momentum in both sectors, but continued expansion. A bit later this morning, the National Association of Realtors will release existing home sales data for the month of May. Sales are estimated to have been 4.08 million, versus the previous level of 4.14 million. Too, the Conference Board will report its May measure of domestic leading economic indicators, which might well have declined 0.3%, compared to a falloff of 0.6% in April. Investors are looking for further evidence of a moderating economy. Such evidence would support anticipated cuts to short-term interest rates, on the part of the Federal Reserve, later this year.
We believe the major domestic stock market indexes can post gains for this holiday-shortened trading week. Through Thursday’s close, the tech-heavy NASDAQ composite was up 1.4%, the broader S&P 500 index had advanced 0.74%, and the blue-chip Dow Jones Industrial Average was holding on to a 0.2% improvement. In recent days it was reported that, for the current month, the Empire State Manufacturing survey showed less-negative momentum in the New York region, but the Philadelphia Fed manufacturing survey was unfavorable and the homebuilder confidence index stepped lower. For May, U.S. retail sales came in weaker than expected, while housing starts and building permits declined; conversely, industrial production and capacity utilization both surpassed estimates. In the week ended June 15th, jobless claims were a bit higher than economists predicted.
Recent positive, share-price momentum in terms of the broad indexes may largely be attributed to the strength of artificial-intelligence (AI) chip maker NVIDIA (NVDA), as well as other tech companies with a toe in the promising AI business segment. NVIDIA has surpassed Microsoft (MSFT) to become the world’s largest company, in terms of market value. That said, a number of NVIDIA shareholders appeared to be taking some profits as yesterday’s trading wrapped up.
Year to date, the NASDAQ, S&P 500, and the Dow have risen approximately 20%, 15%, and 4%, respectively, on top of very solid 2023 performances. Early this year, the indexes tracked higher, and price gains expanded beyond the largest tech stocks. Lately, however, there has been a concentration of the positive momentum toward the largest chip makers, semiconductor manufacturers, and software developers. Also, overall trading volume has been rather subdued.
Excluding the Magnificent 7 tech issues, market improvement looks much less dramatic. Many investors have become concerned that the current market rally might not have much life left. A few pundits are even saying that even if the Federal Reserve cuts short-term interest rates later this year, stocks may only turn in incremental gains. The consensus on the Street seems to be that the Fed will shave 25 basis points off the federal funds rate of 5.25%-5.50%, either in September, November, or December. Investors are hopeful for two such cuts by yearend. An emerging policy trend of lower rates in Western Europe, and its impact on U.S. dollar exchange rates, could help to tip our central bank’s hand.
Our view is that healthy corporate earnings will be sustained in 2024, underpinning the market indexes. Though the potential for increased residential housing rents is a negative, overall inflation will probably ease further. That’s even with the influences of low unemployment and better wages. More-modest Treasury bond rates are making those investments less competitive with equities. On balance, at this time, diversification is crucial to maintain decent portfolio returns. – 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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