The futures market suggests a better day for stocks after yesterday’s losses. Investors will parse important economic and policy news today. Shortly, the University of Michigan will release its August survey on consumer sentiment. Expectations are that this measure will be about even with the prior level of 71.2. The consumer sentiment gauge has been recovering from the June 2022 low of 50.0, but is still well short of the cyclical high of 101.0 reached in February 2020. Also today, the Federal Reserve Bank of Kansas City kicks off its three-day Economic Policy Symposium in Jackson Hole, Wyoming. Fed Chair Jerome Powell will speak this morning, and investors are keen to learn of any hints of possible changes in the central bank’s inflation fighting strategy.
During the first three days of this trading week, stocks made decent headway, with the tech-heavy NASDAQ composite up 3.3% and the broader Standard & Poor’s 500 (S&P 500) Index posting a 1.5% advance; the blue-chip Dow Jones Industrial Average slipped 0.2%. Share prices largely turned lower on Thursday, falling in the 1%-2% range. Apparently, ahead of the Fed symposium, investors decided to take some risk off the table, deemphasizing tech issues. As of yesterday’s close, year to date, the NASDAQ has gained nearly 29%, the S&P 500 has improved close to 14%, and the Dow has stepped up almost 3%, notwithstanding fading investor enthusiasm since July 31st. Overall, the markets may come in about flat for all of this week.
Incoming economic data is shifting Wall Street’s outlook for what the Federal Reserve will do in the remaining months of this year and in 2024. Just a short while ago, the view was that the Fed was at, or near, the end of its current interest-rate hiking cycle. Economists and analysts were anticipating no more than one other 25-basis-point increase in short-term interest rates. The federal funds rate is now 5.25%-5.50%. In recent times, gross domestic product, consumer spending, wage, employment, corporate earnings, and consumer services sector data points have indicated the economy remains healthy. The Street’s latest thinking is that the Fed could possibly continue raising rates this year to an unexpected level, conceivably above the 6% mark, and not begin to cut rates, if at all, until well into 2024.
The Fed will probably proceed cautiously. Previous rate hikes put pressure on the domestic banking sector, most visibly the regional segment, highlighted by the failures of Silicon Valley Bank and Signature Bank in March of this year and, more recently, First Republic Bank in May. Talk of the risks associated with even higher short-term rates has not fallen on deaf ears at ratings agencies Moody’s and Standard & Poor’s, both of which have cut or placed on negative watch the debt of a number of regional banks. Federal Reserve officials are cognizant of the lag effect of their interest-rate raising policy. They likely will take care not to push the economy into a severe downturn. We note that, lately, consumers’ credit card balances (and delinquencies) have been on the rise, major retailers have become more conservative about sales-growth prospects for the coming months, and mortgage lending has turned sharply lower. Too, the manufacturing sector is still contracting.
August and September are not typically good months for stocks. We advise investors to not overreact to near-term volatility. For now, it seems prudent to hold meaningful investment account balances in cash (e.g., money markets) and high-quality bonds (Treasurys). Stock portfolio allocations should be well-diversified, with a substantial weighting in large-capitalization corporate leaders, especially those paying a significant dividend. - 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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