Stock market futures, suggesting a mixed opening today, are reacting to new economic data releases.
The Personal Consumption Expenditures (PCE) Index for August showed a month-to-month gain of 0.3%, versus a 0.1% decline in July. Notably, the core PCE, which strips out the effects of volatile food and energy prices, and is the Federal Reserve’s favored inflation measure, expanded 0.6% from July to August, compared to a flat reading, previously. The year-over-year advances in PCE and core PCE were 6.2% and 4.9%, up from 6.4% and 4.6%, respectively, in the prior month. Additionally real consumer spending rose 0.1% and real disposable incomes also stepped up 0.1% in August. In July, consumer spending contracted 0.1% and income was up 0.5%, month over month.
Later this morning, the Institute for Supply Management will release its Purchasing Managers’ Index for the Chicago region, which is expected to indicate continued, albeit more modest, business expansion in September. That will shortly be followed by the University of Michigan’s readings on consumer sentiment and inflation expectations.
In Thursday’s trading, all 11 of the Standard & Poor’s (S&P) market sectors posted declines. Utilities and consumer discretionary stocks were the biggest drag on the major market indexes, while energy stocks displayed the most resilience. Among the visible losers were iPhone maker Apple Inc. (AAPL), semiconductor manufacturer Advanced Micro Devices (AMD), Royal Caribbean Cruises (RCL), and General Motors Co. (GM). Making up for some of the losses were insurance companies Everest Re Group (RE), W.R. Berkley Corp. (WRB), and The Travelers Cos. (TRV), as well as medical supplies outfit STERIS plc (STE) and credit card issuer Visa (V). The tech-heavy NASDAQ turned in the worst performance for the day, followed by the broad S&P 500 Index and the comparatively more stable blue-chip Dow Jones Industrial Average.
This week, the stock markets appear on track to extend their losing streak that began in mid-August, offsetting all of the gains realized from the mid-June lows. The brief summer rally looks like it was merely a bear market bounce. Unnerving investors worldwide was the new United Kingdom government’s announcement on Tuesday that it would cut taxes, while granting energy subsidies and increasing public funding. The U.K. central bank pushed back on this potential deficit-and-inflation-fueling policy by saying it would aggressively purchase government bonds to limit liquidity in the country’s economy. In reaction, stock and bond markets staged short-lived rallies. Initially, the markets may have overreacted. We don’t see any indication of another global financial crisis, similar to what occurred from 2007-2009, but the U.K. government’s action seems counterintuitive to reining in inflation.
Here in the United States, the Federal Reserve appears intent on raising short-term interest rates, mostly likely into early 2023, to combat inflation. A strong jobs market supports this view. Rates could ultimately hit the mid-4% range, and stay there for much of next year. The effects of inflation and the Fed’s actions are filtering their way through the domestic economy. Declining asset values have hurt Americans’ total wealth, the housing sector is slowing, consumers have become more budget conscious, and corporate earnings look to soften. The Fed will continue to monitor incoming economic data. Central bank officials say they are unlikely to reverse their policy of monetary tightening anytime soon. Market pundits are worried that this aggressive stance will possibly lead to a harsh recession, an outcome we don’t expect.
In the meantime, investors would do well to stay with stable equities of companies with proven earnings, cash flow, and dividend growth records. Subscribers to The Value Line Investment Survey will find a sample list of such companies on page 1630 of the current Selection & Opinion section of the Survey.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
