The futures market indicates a solidly positive open to today’s stock trading. This morning, the Bureau of Economic Analysis (BEA) reported important data for the month of June. The Personal Consumption Expenditures (PCE) index was up 0.2%, matching economists’ estimate and above the prior-month advance of 0.1%. On a year-over-year basis, the PCE slowed to a 3.0% rate; the May data revealed a 3.8% increase. Core PCE, excluding the volatile food and energy sectors, also displayed a gain of 0.2%, monthly, and advanced 4.1%, annually, which was generally in line with expectations and more modest than the month-ago figures. The core data is a key focus for the Federal Reserve in its interest-rate setting policy. On balance, inflation appears headed in the right direction.
Also, prior to today’s trading, the BEA made public its monthly data on personal income and spending for last month. Income expanded 0.3%, below the Street’s outlook and May’s growth, both 0.5%. Spending stepped up 0.5%, ahead of the previous 0.2% rate. Americans remain in a decent position, with dependable earnings providing the means to purchase goods and services. Importantly, a detrimental wage-price spiral has not taken hold. (The employment cost index for the June quarter continued to rise in the 1% range.)
It looks as if the major domestic stock market indexes will post small gains for this week. Stocks trended higher leading up to the Fed’s latest policy news provided Wednesday afternoon. Early in the week, the July flash manufacturing and services purchasing managers indexes calculated by Standard & Poor’s (S&P) came in close to what Wall Street was expecting, with the former improving, but still showing a contraction, and the latter revealing a slightly more modest expansion trend. Additionally, home price (May) and new home sales (June) measures were a bit soft and consumer confidence (July) made further positive progress. We note that investors were not surprised on Wednesday, when the central bank announced another hike in short-term interest rates from 5.00%-5.25% to 5.25%-5.50%.
Stocks jumped at the start of trading yesterday. That was due to last week’s decline in initial jobless claims, healthy durable goods orders for June, a very solid second-quarter gross domestic product report, and a perk-up in June pending home sales. Too, June-quarter corporate earnings reports, now rolling in, largely have been better than analysts’ estimates. Investors are currently viewing good economic news in a positive light. As Thursday’s trading progressed toward the close, though, investors considered news that the Bank of Japan will relax bond yield limits and the markets gave up all of the day’s gains.
Many Wall Street pundits are cautioning that multiples for S&P 500 equities and the leading technology stocks are above the historical averages, and that a modest pullback may be in the offing. The economy is performing well, given higher wages and resilient consumer spending. Even so, consumers are becoming more conservative in their budgets because of elevated inflation and increased borrowing rates. The Fed has three more meetings scheduled for this year, and has not ruled out a further increase in the federal funds rate. Some economists fear that one or more additional rate hikes could meaningfully hurt the financial sector and drag the economy into recession. The consensus on the Street is that such a downturn will be avoided; we do not predict recessions.
At this juncture, investors may want to take some profits on their winners, tech issues included, and shift to other large-cap value stocks, while building some cash to put to work in the event of a market pullback. There’s still a fair degree of uncertainty, so portfolio diversification remains especially important. - David M. Reimer
At the time of this article’s writing, the author had a positions in several of the companies mentioned.
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