The futures markets indicate a favorable open to today’s stock trading. Shortly after the ring of the opening bell, investors will get an updated view of trends in the U.S. services and manufacturing sectors, as shown by Standard & Poor’s “flash” Purchasing Managers Indexes. For September, these indexes are expected to depict a slight improvement in services activity expansion and a firmer, but still contracting, manufacturing sector. Throughout today, Wall Street will gather additional guidance from several Federal Reserve officials in speeches on the economy and central bank monetary policy. We don’t expect these officials to significantly veer from Chairman Jerome Powell’s outlook provided this past Wednesday. It appears that neither the blue-chip Dow Jones Industrial Average (DJIA), broader Standard & Poor’s 500 (S&P 500) index, nor the tech-weighted NASDAQ composite will be able to escape losses for the full week.
Share prices turned downward Wednesday afternoon after Chair Powell reiterated the Fed’s goal of containing the rate of inflation at 2%. He mentioned that gross domestic product growth has been stronger than expected, and that the jobs market remains tight, supporting wage inflation. A majority of Fed officials seem to be open to raising the federal funds rate by another 25 basis points, to 5.50%-5.75%, before the close of 2023. Also, Mr. Powell appears to suggest that it might be more prudent to limit cuts in short-term rates to a total of 50, rather than 100 (as previously anticipated), basis points in 2024. Wall Street has not taken kindly to the updated “higher for longer” rate policy.
The central bank will receive key economic data points before its next scheduled (October 31st-November 1st) Federal Open Market Committee meeting. Most notably, near the end of next week, the Bureau of Economic Analysis, a unit of the U.S. Commerce Department, will release numbers for the Personal Consumption Expenditures index for the month of August. Additionally, in early October, the U.S. Department of Labor will report September Consumer Price Index and Producer Price Index measures, via the Bureau of Labor Statistics. The investment community is hopeful that this incoming data will show modest inflation. A further easing of price gains would potentially provide a reason for the Fed to soon suspend its aggressive interest-rate-raising strategy. Stock market prices likely will react to the data reports, and volatility may increase over the near term.
Notwithstanding recent pressures, this year, thus far, has been a fairly good one for stocks. The NASDAQ, S&P 500, and the DJIA are up more than 26%, 12%, and 2%, respectively. That said, since the end of July, many investors have turned to low-risk bonds and money-market accounts to underpin individual portfolio performance. A number have cashed in on leading tech stock price gains to fund this shift. Too, institutional investors have reduced asset weightings in the top tech winners, building some cash, while buying more “value” issues; this may help to support achievement of favorable 2023 fund performances. September and October are typically not very good months for stocks, but price momentum often improves in November and December. Investors with cash on the sidelines, could be presented with attractive opportunities in the not-so-distant future. The economy currently appears too strong for the broader stock market to fall into an extended period of decline. Recently, a few market pundits have said that we are now experiencing a “normal pullback” in share valuations.
We advise investors to sustain diversity in their equities portfolios, maintaining holdings in industry leaders experiencing solid business growth across the technology, energy, industrial, healthcare, and financial sectors. Substantial balances in cash and bonds are also recommended. – 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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