The futures market implies a positive open to today’s trading. This morning, investors received a number of key July data points to digest. The headline Personal Consumption Expenditures (PCE) price index displayed a 0.2% increase for the month, in line with economists’ outlook and a tick higher than the previous-period expansion of 0.1%. Year over year, the PCE inflation measure advanced 2.5%, on a par with what was expected and June’s rise. The core PCE for July, which excludes volatile food and energy prices, stepped up 0.2%, also matching estimates and the prior showing. On an annual basis, the core PCE was up 2.6%, equal to the rate reported for June; the experts were looking for growth of 2.7%.
Separately, government data was released on personal income and spending in July. Income was expected to improve 0.2%, as it did in the previous month; it advanced at a bit better pace of 0.3%. Spending grew 0.5%, relative to the month-earlier increase of 0.3%.
These economic measures are closely monitored by the Federal Reserve and considered in short-term rate-setting policy. The latest figures back the assumption that domestic inflation is moderating, even as the economy continues to expand at a decent pace. Wall Street remains confident that the central bank will trim the federal funds rate, now 5.25%-5.50%, by at least 25 basis points at its upcoming September 17-18 meeting. The Street is hopeful that such a move will mark the beginning of a series of cuts, possibly totaling one full percentage point by around yearend.
In the meantime, though overall stock market volatility has settled down from its spike early this month, the major market indexes have been posting rather inconsistent positive and negative weekly performances of late. The tech-heavy NASDAQ composite, broader Standard & Poor’s 500 (S&P 500) index, and the blue-chip Dow Jones Industrial Average all hit record highs in July. Notwithstanding share-price consolidation at the start of August, stock valuations have rebounded, albeit somewhat haltingly.
This week, the Dow attained another new record, while the S&P 500 came quite close to a full recovery. The NASDAQ seemed to be on the recovery path, as well, but has lost some momentum in recent days. Through Thursday’s close, the Dow was up a modest 0.4%, the S&P 500 was off 0.7%, and the NASDAQ was down 2.0%. Notably, NVIDIA (NVDA), the leading developer and producer of artificial intelligence chips, reported solid, but more-modest, quarterly operating growth. That said, investors took profits on the stock. Still, the other Magnificent 7 tech stocks gained, as did several issues in the semiconductor sector. A mixed market showing, with divergence among the major indexes, seems likely for the full week. Importantly, favorable price performance is spreading to additional sectors, including financial, health care, and utility issues.
A number of factors could lead to heightened share-price volatility in the coming months. They include the U.S. presidential election, the course of the Israel-Hamas and Russia-Ukraine conflicts, aggressive attacks on ships by the Houthis in the Red Sea and, among other hot global concerns, simmering relations between China and nations near its coast line. Those factors have the potential to offset, at least temporarily, further improvement in domestic inflation and corporate earnings.
Individual portfolios, anchored in large-cap, financially strong stocks, should stand up well to any increase in volatility, while likely delivering solid price appreciation, at least to the end of 2024. Too, portfolios should be diversified among business sectors and include exposure to small- and mid-cap equities. High-quality bonds and cash instruments lend a nice income component, as well. – 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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