Stocks look to trade on the downside at the open of today’s markets. This morning, it was reported that jobless claims for the week ended September 16th totaled a surprisingly low 201,000, down from the prior reading of 220,000. Though still solid, the employment sector has been gradually losing momentum. At the same time, the Philadelphia Federal Reserve released regional data indicating recent softness in the local manufacturing sector. Shortly, the Conference Board will provide an update on U.S. leading economic indicators for the month of August, likely showing slower growth prospects, and the National Association of Realtors will disclose its tally of existing home sales for last month, expected to be modestly better than that of the prior month. Homeowners, who have previously locked in low mortgage rates, have been reluctant to sell and buy new abodes at now higher costs.
Early this week, stocks, notwithstanding some volatility, essentially traded flat leading up to the conclusion of the Federal Reserve’s September 19-20 meeting. Share prices weakened Wednesday afternoon, however, when Fed Chair Jerome Powell spoke at a press conference. As was widely anticipated on Wall Street, the central bank decided to hold the federal funds rate at 5.25%-5.50%. Mr. Powell noted, however, that gross domestic product growth has been stronger than expected and that the jobs market has proved quite resilient in the face of higher short-term rates. He reiterated the Fed’s ambition to bring the inflation rate closer to its target of 2%. Another hike in the fed funds rate, probably on the order of 25 basis points, before the end of 2023 has not been ruled out. Most visibly, investors focused on the Chair’s guidance that a more-modest total cut in short-term rates, of 50 basis points, instead of one full percentage point, is likely in 2024. As well, he noted that quantitative tightening (i.e., much less than complete replacement of maturing bonds on the Fed’s balance sheet) will continue unabated.
Chairman Powell also repeated his prior statement that Fed’s interest rate policy will be guided by incoming economic data. Currently, though companies have generally begun to be more cautious about hiring, those seeking jobs still don’t have much difficulty finding them at favorable pay rates. Labor participation has ticked higher and the unemployment rate has increased, but they remain at subdued levels. Consumer spending is healthy, even as purchases shift more toward necessary day-to-day staples away from discretionary items. Notably, prior to the upcoming late October/early November Federal Open Market Committee meeting, Fed officials will get another read on both the Consumer Price Index and the Producer Price Index. Additionally, next month, a new corporate earnings season will commence.
Federal Reserve board members are well aware of the lag effect of the series of aggressive interest rate hikes they implemented since early 2022. Banks have raised borrowing standards and pulled back on the amount of new loans underwritten. Their finances are stressed, given the higher cost of keeping deposits used to fund loans. Consumers are using up previously distributed government stimulus funds, and relying more on high-interest credit card financing; card balance delinquencies have risen, lately. Also important, rent inflation has moderated. Overall inflation might well continue to trend lower in the months ahead, but increasing energy and food prices bear watching. On balance, the Fed will take care not to lift rates to a level that will drive the economy into a severe downturn.
In sum, it looks as if short-term interest rates will “stay higher for longer” than Wall Street had been hoping. High-quality bonds and time cash deposits, with their elevated interest payouts, have become competitive with equities. That said, investors should remain in the stock market, sustaining good diversity in their portfolios. November and December are historically favorable months for stocks and market pundits are anticipating a nice bounce. An emphasis on energy, industrial, and financial issues seems prudent, at this time. - David 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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