Stocks seem on course for a mixed open to today’s trading, according to the futures market. This morning, investors received additional inflation data points in the form of import prices. For the month of August, the prices of imported goods fell 0.3%, compared to the consensus economists’ expectation of a 0.2% decline and a 0.1% increase in the prior month. Excluding the impact of the volatile fuel component, import prices were down 0.1%, versus the outlook for a 0.2% expansion; previously, this measure was up 0.2%. The new data leave no reason to believe that the Federal Reserve will not move to cut short-term interest rates at its meeting next week. (Note that preliminary numbers on consumer sentiment will be reported shortly; a modest improvement appears in the cards.)
Earlier this week, Wall Street got important August readings on inflation, including the Consumer Price Index (CPI) and the Producer Price Index (PPI). On a monthly basis, the core CPI, adjusted for volatile food and energy prices, was a bit stronger than many on the Street had anticipated; the PPI showed no surprises. Notably, the headline and core annualized index figures were in line with estimates. Considering the trends in inflation data, it seems likely that the central bank will cut the federal funds rate, currently 5.25%-5.50%, by at least one quarter of a percentage point this month. A one-half-point reduction is not off the table. In view of a gradually softening employment sector, there is a case to be made for the Federal Open Market Committee (FOMC) to embark on a series of rate cuts through, and possibly beyond, yearend 2024.
For all of this week, it appears that stocks will post decent low-to-mid-single-digit gains. The major market indexes have firmed, following weakness at the start of September. Over the past few days, the tech-weighted NASDAQ composite has reasserted its leadership, rising 5.3% through Thursday’s close. In comparison, the broader Standard & Poor’s 500 (S&P 500) index gained 3.5% and the blue-chip Dow Jones Industrial Average advanced 1.9%. Year to date, both the NASDAQ and the S&P 500 have increased a little more than 17%, while the Dow has stepped up 8.4%.
Next week, as the FOMC meets to consider its interest-rate strategy, new data will be released on New York State manufacturing, domestic retail sales, industrial production, capacity utilization at factories, business inventories, home builder sentiment, housing starts, and building permits. After the rate decision, on Thursday investors will parse the latest on jobless claims, the Philadelphia Fed’s manufacturing survey, existing home sales, and U.S. leading economic indicators.
Currently, indications are that the domestic economy continues to expand, backed by a resilient services sector; inflation is slowing, notwithstanding persistent housing cost pressure; and the unemployment rate, at just above 4%, is fairly well contained, even as jobless claims trend a touch higher. This scenario supports the argument that the Fed will be successful in achieving the largely elusive feat of a “soft landing” for the economy, without a recession. Despite that potential positive, however, there remains cause for caution.
Incremental share-price gains to yearend are conceivable, but uncertainties to this premise include: the impact of the outcome of the U.S. Presidential election, the sustainability of domestic consumer spending, the level of intensity of the Russia-Ukraine and Israel-Hamas conflicts, threats to the global supply chain posed by the Houthi rebels in the Red Sea, and tensions between China and its neighbors along its eastern coastline. We advise maintaining a conservative slant in individual portfolios, favoring leading large-cap equities, especially those among the real estate, consumer staples, and utility sectors, and including high-quality bond and cash investments. – David M. Reimer
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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