Stock futures were moving in a positive direction prior to today’s trading session. The Bureau of Labor Statistics has released key inflation data for the month of May. Headline Personal Consumption Expenditures (PCE) index figures showed that prices stepped up 0.1%, month to month, versus a 0.4% expansion previously. On a year-over-year basis, the PCE reading fell to growth of 3.8%, compared to 4.4% in April. The monthly core PCE index, which excludes volatile food and energy costs, rose 0.3%, slower than the prior gain of 0.4%. Year on year, core PCE indicated a 4.6% inflation rate, slightly better than the 4.7% pace in April. The Bureau also reported personal income and spending for the month of May, which advanced 0.4% and 0.1%, respectively, with the first measure holding steady and the latter down from the prior-period improvement of 0.8%. Shortly, the University of Michigan will provide its final reading on June consumer sentiment, expected to come in near the 64.0 mark, slightly higher than what was calculated earlier.
The broader market averages look to finish this week on a favorable note, likely rising in the 0.5%-to-1.5% range. That would result in gains above 5.0% for the NASDAQ composite and the Standard & Poor’s 500 (S&P 500) index in the month of June; the Dow Jones Industrial Average (DJIA) appears on track to be up just below 4%. For the first half of 2023, share prices are set to turn in a solid performance, the likes of which have not been seen for many years. Indeed, over the six-month term, the NASDAQ may well post an improvement of better than 30%, while the S&P 500 achieves an approximate 15% gain and the DJIA displays a 3%-plus advance.
Investors are viewing a persistently healthy economy in a favorable light. More specifically, the jobs market is vibrant, marked by low unemployment, elevated wages, and subdued, albeit rising, jobless claims. Momentum in services has eased, but the sector is still expanding. Though overall manufacturing is contracting, government-backed investment, especially in the electronics/semiconductor industry, is limiting the duress. Despite some mixed data, the housing market seems to be firming, most evidently in the single-family residential category. Also, orders for durable goods have perked up lately. Business inventories are now trending closer to sustainable historical levels.
Wall Street is taking the likelihood that the Federal Reserve will continue raising short-term interest rates in stride. That’s probably because the consensus view is that the Fed is nearing the end of its current inflation-fighting policy. Fed Chair Jerome Powell has been suggesting that the central bank will lift the Federal Funds rate one-quarter to one-half of a percentage point above the 5.00%-5.25% range, as of now, later this year. That would follow five points of aggregate increases since early 2022. The core PCE index, the Fed’s preferred inflation measure, is still well above the targeted 2% annual growth rate. After this year, the Fed might well need to hold rates at a high range for quite some time (for most of 2024). The threat of a recession remains, but estimated starting dates keep getting pushed out.
The major domestic stock market indexes have received support from the excitement surrounding generative artificial intelligence, which holds out the prospect of much-enhanced economic productivity in the coming years. Up to now, a limited number of technology issues have powered the indexes higher. There has, however, been a broadening of investment exposure. Investor interest in cyclical (e.g., financial, industrial, minerals) and small-capitalization stocks has expanded. If sustained, this trend would augur well for share prices, going forward. We advise maintaining a well-diversified portfolio, anchored by large, stable equities in industry leaders, while gradually lifting exposure to issues that particularly thrive during a business upcycle. - David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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