The major domestic stock market indexes have displayed some firming this week, following recent weakness. Futures markets are pointing to a slightly positive opening today.
Investors will receive one important data point this morning, that of revised wholesale inventories for the month of July. Wall Street expectations are for sustained steady month-to-month inventory growth of 0.8%.
During the early part of the day, Chicago Federal Reserve President Charles Evans and Fed Governor Chris Waller are scheduled to speak on the economy and the central bank’s ongoing inflation-fighting strategy. At noon, Kansas City Fed President Esther George will provide her own comments. We don’t look for these Fed officials to substantially veer from the central bank’s prior guidance; Chairman Jerome Powell’s statements on August 26th reiterating an aggressive posture.
Indications are that the Fed will hike short-term interest rates by another 0.75 of a percentage point at its next meeting on September 20th and 21st. In the week prior to that meeting, there will be new data releases for the Consumer Price Index, the Producer Price Index, consumer inflation expectations, consumer sentiment, and jobless claims, all of which the central bank likely will be watching closely. This data may perk up the debate on whether a one-half or three-quarter percentage point rate hike is in the cards. Nevertheless, the overarching issue for the economy and the stock market is what level short-term rates will ultimately reach by the end of this year. Talk on the Street is that that level could come in as high as 4.0%; it was near zero at the start of 2022. Some economists are speculating an even higher rate. Chairman Powell has suggested that rates reached by yearend could be held steady through most of 2023.
For all of this week, stocks appear poised to advance in the 1%-2% range, reversing some previous losses. Stocks gained marginally in Thursday’s trading. Advancers led decliners by roughly two to one. Volatility eased. Among the Standard & Poor’s 500 industry sectors, technology, financial, healthcare, industrial, materials, energy, and real estate stocks improved in valuation, while transportation, utility, communications, and consumer staples equities were in the red. Tesla (TSLA), Nvidia (NVDA), KLA Corp. (KLAC), and Regenron Pharmaceuticals (REGN) lent support to the market, and Kraft Heinz (KHC), Apple (AAPL), PACCAR Inc. (PCAR), and Charter Comm. (CHTR) were laggards.
Market pundits are debating whether price-earnings multiples are still too high. Lately, the average multiple for S&P 500 has hovered near the 17.0 mark. It may be argued that inflationary pressures, though easing, are still filtering through the economy and that corporate earnings will take a visible hit in the second half of 2022. Should that scenario hold true, valuations may fall further.
Continued aggressive rate hikes on the part of the Fed might well push the domestic economy into a recession, possibly a harsh one. Conversely, there are indications that commodities prices are falling meaningfully and wage growth is slowing, which could allow the central bank to keep rates below 4.0%. That likely would give a lift to the stock market.
Uncertainties, including the possibility of more COVID lockdowns in China, the outcome of the Russia-Ukraine conflict, and the potential stress of high energy prices this winter on the European economy, might spark greater share-price volatility.
We would not be surprised to see the broader market trade in a relatively narrow range to 2022’s end. For now, it’s probably best to stay with high-quality stocks that offer the potential for consistent long-term gains in total returns.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
