Stock market futures are pointing to a lower opening today. The share-price recovery from this year’s lows, which began in late June, has stalled. Major market indexes are reacting markedly to economic data releases. The Chicago Board Options Exchange volatility index, though still a good measure below its 52-week high, has perked up lately. This morning, the University of Michigan will report its September findings on consumer confidence and five-year inflation expectations. Indications are that these readings will be modestly positive. Equities could use a shot in the arm, given mostly unfavorable data announced earlier this week.
The Dow Jones Industrial Average, Standard & Poor’s 500, and the NASDAQ visibly stepped down Tuesday morning when it was learned that the consumer price index (CPI) was showing continued high inflation. For the month of August, the CPI expanded 8.3%, year over year, versus 8.5% in the previous month. The core CPI, excluding food and energy, also displayed elevated price growth of 6.3%, up from 5.9% in July. On Wednesday, the producer price index (PPI) offered a reason for share prices to firm. The August PPI declined 0.1%, month to month, compared to a 0.4% contraction in July. Retail sales data released on Thursday was mixed. It showed a solid monthly improvement of 0.3% for last month, reversing a 0.4% falloff in July. After stripping out auto sales, however, monthly retail receipts were down 0.3%; that measure was previously flat. Manufacturing information was also mixed, with the Philadelphia Federal Reserve reporting a resounding negative trend, compared to growth in the prior month, and the New York Fed showing a considerably less negative contraction.
For all of this week, the stock market indexes appear poised to suffer moderate losses in the single-digit range. In Thursday’s trading, weakness was apparent in nine of the 11 market sectors. Supporting the markets were investment bank Goldman Sachs (GS), video streaming company Netflix (NFLX), and insurance benefits provider UnitedHealth Group (UNH). Weighing on the broader market were software developers Adobe (ADBE) and Microsoft (MSFT), as well as smartphone maker Apple Inc. (AAPL), and building supply retailer Home Depot (HD).
Investors are awaiting the results of the Federal Reserve’s meeting scheduled for this coming Tuesday and Wednesday. Leading up to this meeting, the consensus on Wall Street appeared to be that the central bank will raise short-term interest rates by another 0.75 of a percentage point. Some pundits, though, suggest that the Fed could turn even more aggressive, implementing a one-point hike. We don’t believe the Fed would want to shock the markets, but such a large move cannot be ruled out. More important is what level the Fed will ultimately lift rates to; somewhere in the 3.5%-4.0% range seems most likely. In addition to the in-progress rate moves, the central bank is taking liquidity out of the bond market to rein in inflation by not fully replacing maturing securities on its balance sheet. The rising interest rates and easing economic activity suggest a recession is at hand.
To the end of this year, we look for the major stock market indexes to continue trading between their highs realized in early January and their lows hit in mid-June. Aside from keeping a close watch on inflation and the Fed’s interest rate strategy, investors surely will be perusing upcoming corporate earnings reports, which may well reflect more inflation stress. Stock market volatility will probably stay somewhat elevated. On a positive note, much of the recent volatility can be attributed to institutional program triggered trading, rather than individual retail investor action; thus, providing a floor for share prices. We advise investors to maintain a sizable portfolio weighting of equities in well-established companies with reliable cash flow, earnings, and dividend growth.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
