Weekly Market Update: August 26, 2024

Inflation continues to slow. This was evident in the latest round of consumer and producer (wholesale) price data. The Consumer Price Index (CPI) increased 2.9% for the 12-month period ended July 31st. This was the first reading below 3% since 2021 and, along with a sharp retreat in the July Producer Price Index (PPI), indicates that the Fed’s most restrictive monetary policy course in four decades is working.

But at what cost has the battle to tame inflation come for the U.S. economy? The latest data suggest that the domestic economy is losing some steam following a solid second-quarter showing. True, retail sales did advance by an outsized 1.0% in July, far exceeding the consensus forecast. However, a closer look showed that much of the gain was fueled by the upper (and wealthier) classes, while lower-and middle-income households have cut back on spending, with fatigue from years of higher prices for goods starting to take a toll. Meantime, industrial production fell more than expected last month, and residential construction, an important contributor to the nation’s gross domestic product (GDP), declined sharply.

The stage appears set for the Federal Reserve to begin reducing the benchmark short-term interest rate at its September Federal Open Market Committee (FOMC) meeting. Our expectation is that the central bank will implement a quarter-point cut, despite calls for a half-point reduction from Wall Street. With inflation moving in the Fed’s desired direction, the FOMC may be more concerned about staying “too restrictive for too long” and jeopardizing the possibility of a soft landing for the economy.

Meanwhile, second-quarter earnings season was a successful one for Corporate America. True, a handful of prominent companies missed estimates and/or lowered forecasts, and their stocks were punished by Wall Street. However, profit growth for S&P 500 companies averaged over 10% for the period, which was good enough to provide support for most stocks that were trading at elevated price-to-earnings multiples entering reporting season.

Conclusion: We continue to recommend a diversified portfolio consisting mostly of high-quality stocks and cash-equivalent securities. Given the growing global economic and geopolitical uncertainty heading into September, the worst-performing month for equities over the past century, we think some caution may be warranted.

Source: ValueLine.com