In view of the futures market, stocks look to open in a solidly positive fashion today. Prior to the bell, investors received pertinent economic data. The Bureau of Economic Analysis (BEA) reported August inflation numbers. Its Personal Consumption Expenditures (PCE) price index, closely watched by the Federal Reserve, rose just 0.1% in the month, matching economists’ estimate and down from the prior-period expansion rate of 0.2%. Year over year, the headline PCE was up just 2.2%, compared to the outlook for 2.3% and July’s annual advance of 2.5%. The core PCE, excluding volatile food and energy costs, displayed a slight 0.1% uptick, below the consensus expectation and the previous monthly pace, both 0.2%. On a year-to-year basis, the core figure gained 2.7%, on a par with what was anticipated and a tad stronger than the 2.6% growth recorded in July. The latest price data support the idea that the Fed will continue to reduce short-term interest rates in the coming months.
Also in the moments leading up to today’s stock trading, the BEA released new information on personal income and personal spending for August. Income trended 0.2% higher, in contrast to the experts’ forecast of 0.4% and short of the 0.3% step-up scored last month. Spending grew 0.2%, one-tenth of a point shy of what was expected, and slower than the 0.5% pace realized in August. Though a bit softer, these figures do not significantly detract from the assumption that the domestic economy remains healthy. The United States appears headed for a soft landing, avoiding a recession.
As regular market watchers are probably well aware, the Federal Reserve cut the federal funds rate by one-half of a percentage point, to 4.75%-5.0%, at its meeting earlier this month. That cut was widely anticipated on Wall Street, immediately prior to the Federal Open Market Committee (FOMC) get-together. The central bank has additional 2024 FOMC meetings scheduled for November and December. Chairman Jerome Powell, as well as other of the bank’s key officials, has suggested that upcoming rate cuts will each be on the order of 25 basis points. Even so, many on the Street are hopeful the Fed will be more aggressive, given signs the employment sector and economy could come under heightened pressure in the months ahead. Ultimately, we believe the Fed might cut rates by two percentage points, to the low-3% range, by the end of 2025. Employment, business, and economic trends will determine the actual total.
The prospect of lower short-term borrowing rates has lent support to stock valuations. This week, the major market indexes appear on track to post decent improvements. Through Thursday’s close, the tech-heavy NASDAQ composite was up 1.3%, while the broader Standard & Poor’s 500 (S&P 500) and the blue-chip Dow Jones Industrial Average had gained 0.7% and 0.3%, respectively. The S&P 500 and the Dow attained new records this week; the NASDAQ continues to make progress closing in on its high reached this past July. Last week, the Fed’s rate move lent a boost to share prices. Yesterday, fewer than expected initial jobless claims (for the week ended September 21st) and a strong revised Gross Domestic Product growth number (3.0%) also gave a lift to investor sentiment.
Next week, shares are sure to move on new manufacturing, services, and employment data. Barring any significant unfavorable political or economic news, we would not be surprised to see the market indexes achieve additional incremental gains to yearend. Still, a market-moving “Black Swan” event can never be ruled out. Tensions in the Middle East and Asia could lead to greater uncertainty and stock market volatility in the short run. Thus, investors should maintain substantial weightings of high-quality stocks, bonds, and cash instruments in their individual portfolios for now. – David M. Reimer
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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