A look at this morning’s futures market suggests a mostly positive open to today’s stock trading. The U.S. Bureau of Labor Statistics released data on import prices that provided additional evidence inflation is slowing. For June, those prices slipped 0.2%, month to month, versus economists’ expectation for a 0.1% decline and the 0.4% contraction in May. Over the past year, prices have fallen 6.1%. Excluding volatile fuel data, import prices were 0.4% lower. In May, that adjusted measure was unchanged. The year-on-year change was a minus 1.4%. Shortly, the University of Michigan will make public its preliminary consumer sentiment index reading for July. Expectations are for a level of 65.5, compared to a similarly modest previous-month showing of 64.4.
The major market indexes, led by the tech-heavy NASDAQ composite, appear on track to post gains in the 2%-4% range this week. Supporting renewed optimism in the stock market in recent days were updated Consumer Price Index (CPI) and Producer Price Index (PPI) numbers pointing to an easing in the growth of the cost of goods and services. The June data indicated that the year-on-year advance in the core CPI, adjusted for volatile food and energy prices, slackened to 4.8% from 5.3% in May. The core PPI expanded at a rate of 2.6%, down two tenths of a percent from what was recorded in the prior month. In the months ahead, the year-earlier comparisons won’t be as easy as in June, but we would not be surprised to see the favorable trend in prices persist to yearend.
Investors are feeling optimistic. Lower trending inflation suggests that the Federal Reserve won’t need to be particularly aggressive in its inflation-fighting strategy over the next several months. Indeed, many on Wall Street now seem to expect just one more one-quarter of a percentage point increase in short-term interest rates, to 5.25%-5.50%, at the central bank’s upcoming July meeting. The consensus is that that could be the last hike in the current cycle; rate cuts might possibly occur by late 2024.
Fear of a recession has subsided as 2023 progresses. The domestic job market is proving quite resilient and consumer spending remains solid. That said, we do note that consumers are more frequently trading down to economical private label, as opposed to premium brand name, goods. Defaults on credit cards and consumer loans are starting to tick up. Too, a larger number of people are staying put in their jobs and not seeking big pay raises as they see more employers beginning to tighten operating budgets. Companies’ pricing power appears to be softening. While no one can declare there won’t be a recession within the next 12 months, we are reasonably confident in saying that any such downturn will probably be fairly modest.
So far this year, stocks are doing well. The NASDAQ is up a strong 36%, while the broader Standard & Poor’s 500 index and the blue-chip Dow Jones Industrial Average have gained about 18% and 4%, respectively. For much of 2023, a small group of big technology issues have largely driven share prices higher on optimism surrounding generative Artificial Intelligence, more specifically, its potential benefits to productivity and the economy. Lately, however, given rising hope that the Fed can execute a soft landing (i.e., no recession), a wider population of stocks, inclusive of mid- and small-capitalization equities, are improving in valuation. A new corporate earnings season is commencing, and investors surely will be closely examining operating trends and reviewing managements’ comments on near-term business prospects. Any surprises could lift share-price volatility. On balance, we believe investors can add some diversity to their portfolios beyond core large-cap holdings. Sustained stock-market gains could lead to a shift in funds late this year from conservative money-market and high-quality bond accounts to equities. Such a scenario, of course, is not guaranteed. - 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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