Weekly Market Update: July 8, 2024

Inflation is trending in the right direction for the Federal Reserve. The Personal Consumption Expenditures (PCE) Price Index, the gauge of inflation most closely watched by the Fed, was unchanged in May, which was a notable improvement from the 0.3% increase registered in April. The core PCE Price Index, which excludes the food and energy components, rose just 0.1%, also down from the previous month’s figure of 0.3%. On a 12-month basis, the PCE and the core PCE were both up 2.6%, a slowdown from their respective April readings of 2.7% and 2.8%. This report had to please the data-driven central bank in its battle to tame inflation.

The May inflation data raised optimism that the lead bank can orchestrate a “soft landing” for the U.S. economy, and even make a rate reduction later this year. A “soft landing” refers to inflation cooling without triggering a recession and a sharp rise in unemployment. On point, the number of available jobs in the U.S. unexpectedly rose in May, signaling still-heightened demand for workers. (Investors should note that the June labor report was due shortly after we went to press.) The Labor Department also recently reported that personal income rose a healthy 0.5% in May, which is typically good news for the consumer sector. However, the same report indicated some fatigue among consumers saddled with high credit card balances, as personal spending came in below the April figure. This bears watching as the consumer sector accounts for roughly two-thirds of the nation’s gross domestic product.

Second-quarter earnings season is at hand. The next few days will bring a slew of reports from the big, money center banks. These results should provide more insight about how the economy is faring. It also is worth noting that the Federal Reserve’s annual stress test of the U.S. banking system showed that the 31 largest banks have enough capital reserves to withstand a severe recession scenario.

Conclusion: The month of July, which has historically been kind to investors, began with the major equity averages near record highs. With inflation seemingly moving in the right direction and corporate earnings optimism high, stocks are positioned to potentially deliver additional gains in the second half of this year. 

Source: ValueLine.com