The major domestic stock market indexes appear positioned for a positive opening today. On Monday and Tuesday of this week, the Dow Jones Industrial Average, Standard & Poor’s 500, and the NASDAQ all displayed softness, as investors were on edge prior to the U.S. Labor Department’s release of its latest inflation data. Announcements of lower productivity and higher labor costs for the June quarter were not supportive. Then, on Wednesday, evidence of a slight easing in inflation materialized in a flat month-to-month consumer price index (CPI) measure and a more-modest core CPI (excluding food and energy prices) advance for the month of July. The year-on-year inflation figures displayed improvement, as well.
Early Thursday, the producer price index (PPI) for last month further indicated a throttling back of inflation. The encouraging CPI and PPI numbers helped to lift share prices. As Thursday trading progressed, however, stocks lost some ground. Initial jobless claims for the week ending August 6th, though less than expected, increased above the prior-week level, and continuing jobless claims through July 30th ticked higher.
We look for the major market indexes to achieve one to two percentage-point gains for all of this week. This morning, the University of Michigan will report on August consumer sentiment and five-year inflation expectations. Indications are that consumers have become less gloomy about their economic prospects and that their long-term outlook for inflation is now more conservative; lower gasoline prices likely played a role in these positive trends.
In Thursday’s market activity, stocks were mixed. The energy, industrial, transportation, financial, and materials sectors gained, while technology, consumer discretionary, and utility equities were a visible drag on the indexes. Leaders for the day included Walt Disney (DIS), ConocoPhillips (COP), Exxon Mobil (XOM), Schlumberger (SLB), and Honeywell International (HON). Among the lagging issues were Zoom Video Comm. (ZM), Pfizer (PFE), Tesla (TSLA), Amazon.com (AMZN), and Johnson & Johnson (JNJ). Share-price volatility remained unremarkable.
Since mid-June, the stock market has embarked on a discernable recovery. Notably, the NASDAQ, having increased more than 20% from its recent low, is technically in a bull market. Still, many on Wall Street say that the recent upswing could prove to be just a bear market rally. Most prominently, in the coming months, the high cost of rent and food likely will continue to weigh on household budgets. Too, with many refineries shutting down for seasonal maintenance, gasoline and diesel prices could step up, exacerbating the situation. Also worrisome, home-heating fuel costs could be substantial late this year and into early 2023. Wage growth may not fully offset elevated inflation. Higher wage, materials, components, and borrowing expenses are still filtering into the economy, and could restrain companies’ earnings performance. Relief brought by product and service price hikes might become less supportive.
To yearend, as the Federal Reserve will probably continue to raise short-term interest rates to combat inflation, even if there is more visible progress on that front, share-price advances may be incremental. Thus, investors will want to stay with financially sound industry leaders, possessing decent long-term business prospects.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
