Weekly Market Update: July 24, 2023
The inflation outlook continues to improve. This was reflected in the June price data, which showed slowing growth on both the consumer and producer (wholesale) levels. On a 12-month basis, the Consumer and Producer Price Indexes were down notably from 2022 highs, with the latter running near the Federal Reserve’s target growth rate of 2.0%.
This has created a “Goldilocks” scenario for Wall Street. The cooling inflation figures have been accompanied by mostly better-than-expected economic data of late. Treasury market yields and the value of the U.S. dollar retreated on the price data, giving a boost to equities. A resilient consumer, supported by a still healthy labor market, also assuages concerns about a “hard landing” for the U.S. economy. It should be noted that consumer sentiment in early July, as measured by the University of Michigan, rose sharply.
Second-quarter earnings season got off to an encouraging start. Investors were eyeing the latest results from the big money center banks, given the early spring turmoil for the regional lenders. Those results included profit gains and, even more heartening, minimal red flags, such as abnormally large increases in loan loss reserves, which are accounts created to provide capital for potential loan defaults. Overall, the current expectation is that earnings for the S&P 500 companies fell about 7% in the second period, which would mark the third-straight quarterly decline in profits.
The next few Federal Open Market Committee (FOMC) meetings will be highly scrutinized. The Fed is expected to raise the federal funds rate by a quarter point, to 5.25%-5.50%, at this week's meeting. Beyond that, we think the central bank should be wary of over-tightening the monetary reins and hurting the consumer and labor sectors. The U.S. money supply continues to shrink and the accompanying higher rate environment will make it much harder for consumers, businesses, and the government to meet their debt obligations. This scenario would be detrimental to economic expansion.
Conclusion: Equities have continued to recover from a difficult performance in 2022. However, with corporate earnings still on the decline and the Fed maintaining its hawkish monetary stance, we recommend holding stocks of high-quality companies.