This holiday-abbreviated week has historically been marked by lower trading volume, as traders take a long holiday around the Independence Day celebration, and the summer vacation season starts to heat up. The resultant lighter trading volume, though, could cause a spike in intra-day volatility. If it doesn’t, credit a year in which the market bulls, save for a pullback on some hawkish monetary comments from senior Fed officials following the June Federal Open Market Committee (FOMC) meeting, have been in charge most of the time. Investors should note that the stock market closes at 1:00 P.M. (EDT) today, and will remain closed tomorrow in observance of the July 4th holiday. The U.S. bond market closes at 2:00 P.M. (EDT). Later this morning, at 10:00 A.M., we will get the June reading on manufacturing activity from the Institute for Supply Management, a Tempe, Arizona-based trade group.
The equity futures are indicating a mixed opening when trading commences stateside, with the NASDAQ Composite looking to build on Friday’s sharp move higher, which was prompted by the May personal income and spending report and the latest Personal Consumption Expenditures (PCE) Price Index reading (more below). The S&P 500 Index is looking at a flat start to the second half of the trading year after recording a 16% rally in the first six months of 2023. Looking at individual stocks, electric vehicle maker Tesla (TSLA), which has been on a meteoric rise this year, is set to take another step up after the company noted over the weekend that second-quarter deliveries rose sharply.
Last week the major equity averages rallied sharply, fueled by some encouraging data on the economy and a smaller-than-expected increase in the PCE Price Index, which is the most closely tracked measure of inflation at the Federal Reserve. The economic data were highlighted by the final revision to the first-quarter gross domestic product (GDP) estimate, which was raised to 2.0%, from the May reading of 1.3%. That figure, though very encouraging, is more backwards looking. Investors were encouraged by strong figures for durable goods orders, consumer confidence, and new home sales. The solid economic data gave more credence to the notion that the Federal Reserve may be able to orchestrate a “soft landing” for the U.S. economy, as it winds down the most restrictive monetary policy course in 40 years.
The May PCE Price Index was an encouraging sign that prices are starting to moderate. Specifically, the PCE Price Index increased 3.8% over the 12-month period, which was the lowest annual change in two years, and down from 4.3% registered the prior month. On a month-to-month basis, the PCE Price Index rose 0.1%, compared to 0.4% in April. When backing out the volatile energy and food components, the core PCE Price Index increased 0.3%, which was slower than the prior month.
This price news was greeted warmly by Wall Street, as Federal Reserve Chairman Powell has said that the central bank will be “data dependent” when formulating monetary policy. These more benign figures have many market pundits thinking that the Fed will back off its more hawkish stance after an expected quarter-point hike to the federal funds rate at this month’s Federal Open Market Committee (FOMC) meeting. With inflation showing signs of moderating and the economy holding up much better than expected, investors continue to flock to more risky assets this year. This has been a boon for the higher-growth sectors, headlined by the mega-cap technology companies. It also should be noted that the small- and mid-cap stocks are starting to participate in the rally, which is a good sign for the market.
Later this week, Wall Street’s attention will turn to the labor market, with the June report on employment and unemployment due on Friday morning. The continued strength of the labor market has kept the central bank on a more hawkish monetary course, but if the sector starts to show some stress, the Fed may begin to think about ending the monetary policy tightening cycle. The consensus expectation is that the nation added 240,000 jobs in June, which would be nearly 100,000 positions below the May figure of 339,000, but still a sign of a strong labor market. The unemployment rate is expected to decline modestly, from 3.7% to 3.6%, yet another sign of a tight labor market. The jobs report has the potential to drive trading at the close of the week, given how focused Wall Street is on the Federal Reserve right now, especially with it being a quiet period for corporate earnings.
From an investment perspective, the recent economic data have been quite supportive for stocks, as it has created a Goldilocks scenario for investors. The economic data have been not too hot and not too cold, with the former not stoking concerns that inflation will heat up again later this year. And, as noted above, the better-than-expected news from the business beat is giving investors hope that even if the U.S. economy enters a recession, the downturn would likely be a very mild affair. One thing that will continue to bear watching is whether the consumer, who has been the pillar of the economy’s recovery from the COVID-19 pandemic, can keep going at the current pace. The May personal income and spending report did show that the U.S. consumer is becoming a bit more cautious with regard to spending. This may not be great news for the retailers and their stocks in the second half of this year. - William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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