The futures market suggests a modest pullback today in the stock recovery that began earlier this week. Prior to today’s opening bell, the U.S. Census Bureau released July housing sector data. Domestic housing starts totaled just 1.24 million, compared to economists’ more-optimistic consensus estimate of 1.33 million and the prior-month figure of 1.33 million (revised from 1.35 million). Building permits amounted to 1.4 million, versus the outlook for 1.42 million and the June level of 1.45 million. The sector remains stressed, as the supply of single-family homes for sale is well short of buyer demand. Lower mortgage rates, of late, implies an eventual loosening of this tight market. The seemingly rising likelihood that the Federal Reserve will begin cutting short-term interest rates this September augurs well for housing, as well as the broader economy.
Shortly, the University of Michigan will report on its preliminary survey of consumer sentiment for the month of August. It’s expected to come in at the mark of 66.6, which would be a slight improvement over the previous-month reading of 66.4. As we have noted before, this gauge of consumer opinion has been strengthening, albeit haltingly, from the most recent low of 50 hit in the summer of 2022. Still, it’s well off the high of 101 recorded in February of 2020. Elevated prices for goods and services are weighing on household budgets. Higher wages and low unemployment are positives, but have lent limited support to optimism.
For all of this week, stocks appear on course to post fairly decent gains. Through Thursday’s close, the tech-heavy NASDAQ composite, broader Standard & Poor’s 500 (S&P 500) Index, and the blue-chip Dow Jones Industrial Average were up 5.1%, 3.7%, and 2.7%, respectively. Late last week and early this week, hedge funds reduced their debt leverage by selling equities, placing pressure on the indexes. This largely technical influence, as opposed to more-critical business fundamentals, appears to have subsided. Stock buying interest improved from Tuesday forward thanks mostly to tame July inflation, as measured by the Producer Price Index and the Consumer Price Index. Too, healthy retail sales scored last month and modest initial jobless claims for the week ended August 10th were pluses for the markets.
Over the past few days, a majority of the Magnificent 7 tech stocks, with the exceptions of Microsoft (MSFT) and Meta Platforms (META), have regained investor interest and outperformed the S&P 500. In July, it seemed that portfolios were rotating out of the tech leaders toward small- and mid-cap stocks. Lately, that trend has broken down. Even so, the Russell 2000 was up a respectable 2.6% at Thursday’s closing bell. Investment diversification is proving a favorable strategy.
The Federal Reserve next meets September 17-18. Wall Street widely anticipates a 25-basis-point cut to the federal funds rate, currently 5.25%-5.50%. Hopes for a bigger one-half-point move appear to be fading but, given softness in the labor market and easing inflation, many on the Street look for two additional one-quarter-point cuts in November and December. Such a scenario is quite plausible. We note that bond markets have rallied on this outlook.
Stock valuations, relative to earnings, have once again risen to above historical levels, though, in our view, a speculative bubble has not yet formed. The U.S. economy looks headed for a soft landing, with sustained growth and no recession. We believe corporate earnings and employment will stay firm enough, and inflation soft enough, to underpin incremental advances in the major stock indexes through the end of 2024. – David M. Reimer
At the time of this article’s writing, the author held positions in none of the companies mentioned.
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