Weekly Market Update: February 26, 2024

The pace of price growth accelerated in January, ending the downward trend witnessed during the final months of 2023. Indeed, hotter-than-expected readings on consumer prices were followed by higher inflation at the producer (wholesale) level. The January Producer Price Index (PPI) and core PPI rose 0.3% and 0.6% on a month-to-month basis, respectively, handily topping the consensus forecasts. While this may prove to be a temporary hiccup in the Federal Reserve’s battle to tame inflation, it could force the lead bank to keep the federal funds rate high for a while longer.

The Federal Reserve will be walking a tightrope on the monetary policy front in the coming months. Senior Federal Reserve officials don’t want to make a mistake like the 1970s when inflation began to reaccelerate after the central bank began cutting rates. However, the Fed must guard against staying too high for too long and risk causing dysfunction in parts of the economy, particularly in the rate-sensitive regional bank, commercial real estate, and housing sectors. On the latter front, January housing starts fell short of both the consensus expectation and the prior month’s tally.

This scenario puts extra focus on the January Personal Consumption Expenditures (PCE) Price Index. That reading, which is due on February 29th, is the assessment of inflation most closely monitored by the Federal Open Market Committee (FOMC). Our sense is that the PCE, much like the January price data, will likely be higher than expected.

Meantime, fourth-quarter earnings season has been a pleasant surprise for Wall Street. With more than 80% of S&P 500 companies reporting quarterly results at press time, the overwhelming majority have exceeded revenue and earnings-per-share prognostications. The average earnings growth was just above 3%, which would mark the second consecutive quarter that the index has recorded profit gains. The positive news from Corporate America has provided support for equities, which may have otherwise suffered a bigger selloff on the recent inflation data.

Conclusion: Given the higher inflation readings last month, and the still uncertain time frame for when the Federal Reserve may pivot on the monetary policy course, we recommend a portfolio consisting mostly of high-quality equities and cash-equivalent securities.

Source: ValueLine.com