The Steross Market and Investing Thread
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We’re just about done with Q1 earnings season. More than 90% of companies in the S&P 500 have reported results. So far, the earnings season is much better than expected (or feared). Earnings growth for the S&P 500 is tracking at 5.15%. That’s up 1.46% from just a month ago.
That’s the best growth rate since Q2 2022. More than 76% of companies have beaten their earnings estimates.
There is, however, a statistical footnote to these results and that’s Bristol-Myers Squibb (BMY). If you exclude BMY’s massive loss, then earnings growth for the whole index rises to 8.3%. One company’s loss weighed the whole market down by 3%.
That’s the best growth rate since Q2 2022. More than 76% of companies have beaten their earnings estimates.
There is, however, a statistical footnote to these results and that’s Bristol-Myers Squibb (BMY). If you exclude BMY’s massive loss, then earnings growth for the whole index rises to 8.3%. One company’s loss weighed the whole market down by 3%.
Dow Jones Industrial Average Tops 40000 for the First Time
The Dow Jones Industrial Average crossed 40000 for the first time, a milestone that appeared implausible little more than two years ago when the Federal Reserve began raising interest rates to cool an overheated economy.
Gloom and doom forecasts abounded. When the central bank ended the era of ultralow rates that prevailed in the years following the global financial crisis, economists predicted painful consequences: a U.S. recession and rising unemployment.
Markets shuddered. The Dow industrials and other equity benchmarks ended 2022 with their biggest declines since 2008, the year Lehman Brothers collapsed.
But as the months passed, employers kept adding jobs. People kept spending, splurging on big-ticket items like cars and blowout getaways to see Taylor Swift. Inflation kept cooling. Perhaps most important, the recession predicted by so many economists hasn’t materialized, giving investors hope that stocks might keep climbing.
“Not only didn’t we have a recession, we had a robust economy with tight labor markets, healthy consumers who were consuming,” said Katie Nixon, chief investment officer for Northern Trust Wealth Management.
Markets got another boost when advances in generative AI, the kind of artificial intelligence used in OpenAI’s ChatGPT, captured investors’ imaginations, helping propel the biggest tech stocks skyward.
The Dow has now soared nearly 40% from its low in September 2022—and more than doubled since the spring of 2020, when attempts to slow the spread of Covid-19 closed swaths of the economy. The 30-stock index has risen about 6% this year.
The latest leg of the rally has been powered by signs of continuing U.S. economic strength, offsetting the retreat of investor expectations that inflation will cool enough to allow central-bank officials to sharply reduce interest rates this year. Recent data showed hiring slowed in April, but the labor market remains robust and inflation has declined from its peaks without returning to the Fed’s target.
Yet interest rates remain much higher than in the years before the pandemic. The yield on the 10-year Treasury topped 5% in October for the first time in 16 years.
Higher yields weigh on stocks by lowering the value of companies’ future earnings in commonly used pricing models. They also give investors opportunities to earn a meaningful return without the level of risk found in the stock market.
The jump in rates is one outgrowth of the pandemic that continues to reverberate throughout the economy. For example, the Fed’s efforts to tame inflation have had a profound effect on the cost of borrowing to buy a home. The average rate on a 30-year fixed-rate mortgage in October reached 7.79%, the highest since 2000, according to Freddie Mac.
Homeowners who would like to move are staying put so they can hold on to their lower-rate mortgages. The resulting lack of homes for sale has pushed prices beyond the reach of many prospective buyers.
“We’re still dealing with a number of these economic distortions that can all be traced back to Covid,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management. “That’s why a lot of forecasters have had difficulty over the past couple of years.”
Stocks have rallied over the past year as the economy defied expectations and investors exulted in the possibility that innovation in AI leads to a surge in productivity. The enthusiasm around AI fed into last year’s hottest trade, the Magnificent Seven group of big tech stocks.
Nvidia, the chip maker at the heart of the AI boom, has seen its market value soar to more than $2 trillion. Microsoft reached $3 trillion, its shares energized by a partnership with OpenAI.
“AI has definitely changed the picture for investors,” said Que Nguyen, chief investment officer of equity strategies at Research Affiliates. “AI is real. I think that AI is going to have a big impact on productivity and how we work.”
In many ways, the picture for markets looks rosy. Stocks beyond the Magnificent Seven, from small-caps to industrials, have gained ground lately, a potentially promising sign for the rally. Even bitcoin and gold prices have hit records in recent months.
“We sort of have a bull market in lots of different things,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “There are plenty of times where bonds and stocks do well, but that’s usually not a backdrop where gold does well. That’s kind of a manifestation of bullish on everything.”
Still, some investors worry that stocks look expensive, especially the biggest ones. That could leave them vulnerable if corporate performance disappoints.
“I do think there’s a bit of a reckoning coming for U.S. equity market valuations,” said Don Calcagni, chief investment officer at Mercer Advisors. “It just doesn’t seem logical given how high interest rates are at the moment.”
S&P 500, Nasdaq and Dow all hit record highs after encouraging inflation data
All three major indexes surged to record highs Wednesday after new data showed that inflation cooled in April after ticking up recently.
The S&P 500, tech-heavy Nasdaq Composite and blue-chip Dow all closed at new record highs after the latest Consumer Price Index showed that prices were up 3.4% for the 12 months ended in April, easing from 3.5% the month before.
The broad-market S&P 500 gained more than 1.2% on Wednesday and cracked the 5,300-level for the first time, closing at 5,308.15. The Nasdaq was about 1.4% higher, setting a new record at 16,742.39. The Dow, meanwhile, was up 350 points or 0.9% and teetered near the key 40,000-level, closing at 39,908. All three major indexes are tracking toward a winning week.
Investors believe that the cooler inflation reading, coupled with a separate report showing weak retail sales in April, increases the likelihood that the Federal Reserve will cut interest rates this year.
“Taken [together with retail sales] this supports a Fed rate cut in the fall,” Gary Pzegeo, head of fixed income at CIBC Private Wealth US, wrote in a note to clients Wednesday. “Markets are discounting a cut in September and have moved to price in a second cut by December.”
Wednesday’s report landed mostly in line with economists’ expectations, which is a welcome turnabout from January, February and March, when CPI (and other inflation gauges) came in hot, hot, and hot.
“This was a good report in the context of three hotter-than-expected [CPI] reports, and it makes it look like potentially those were bumps in the road rather than a really stagnant inflation environment,” Tyler Schipper, economics professor at the University of St. Thomas in Minnesota, told CNN in an interview.
On a monthly basis, prices rose 0.3%, a slower pace of growth than the 0.4% seen in the two months prior, according to the Bureau of Labor Statistics’ CPI report.
Economists were expecting a 0.4% monthly increase and an annual gain of 3.4%, according to FactSet consensus estimates.
Rising gasoline and shelter costs accounted for more than 70% of the monthly increase in overall inflation, according to the report.
While elevated housing costs and high prices at the pump continue to weigh on Americans, Wednesday’s report did provide some welcome news on another staple spending area: Grocery prices fell for the first time in a year, dropping 0.2% from March.
A closely watched underlying measurement of inflation showed even more progress. Core CPI, which strips out the more volatile categories of energy and food, slowed from 3.8% to 3.6%, its lowest rate since April 2021. From the month before, core CPI ticked up by 0.3%, its slowest pace since the end of last year.
Prices are cooling but some pain points remain
In addition to grocery prices falling for the month, overall food prices and the cost of going out to eat saw some easing as well. Food price inflation held pat at 2.2% annually, while food away from home inflation ticked down to 4.1%, its lowest rate since May 2021.New and used car prices continued to fall from record heights; but, especially in this period of high interest rates, they remain costly endeavors — not only to purchase but also to maintain.
Motor vehicle insurance continued its painful rise in April, climbing 1.8% for the month and rising to 22.6% annually. Repair and maintenance costs were flat for the month but are still running well above overall inflation at 7.6% annually.
Apparel prices jumped higher for the month, with some categories such as men’s shirts and women’s suits up nearly 3%.
For those to leap higher at a time when goods prices are seeing disinflation (in some cases, outright deflation), could be a reflection of broader trade problems globally and a potential issue for consumers — and incumbents — later this year, Schipper said.
“It might not be particularly problematic now; but if you think about the fall, when it’s election season, and people are doing back-to-school shopping, that could be a category that becomes politically problematic,” Schipper said.
A slow drift downward
However, April’s report did show some slight progress on what’s been the biggest Achilles heel: Shelter inflation eased to 5.5%, its lowest annual rate since May 2022.Housing costs “have been a pretty persistent area of pain over the past several years,” John Sedunov, professor of finance and real estate at Villanova University, told CNN.
The housing component of the CPI has proved frustrating for economists and other observers because the government’s measurement of shelter costs come with a considerable lag. Private sector sources of real estate data have shown a cooling rental market.
When taking those housing costs out of the equation, a closely watched “supercore” index measuring services inflation that excludes shelter costs rose just 0.2% for the month, its slowest pace since last summer.
The Federal Reserve has been wanting to see meaningful process on inflation before it starts trimming back interest rates. Those rates are at a 23-year high following an aggressive, yearslong rate-hiking campaign by the central bank to throw water on smoldering demand and tame decades-high inflation.
“The last month or two had looked like maybe the improvement was stalling, and this [report] looks like it’s continuing at a slow pace,” Erica Groshen, a former BLS commissioner who serves as senior economics adviser at the Cornell University School of Industrial and Labor Relations, told CNN.
Inflation has cooled considerably after spiking to 9.1% annually in June 2022, and the economy has remained resilient in the process — although there are signals that the once-rampant pace of spending activity has cooled.
A separate report on Wednesday showed that US retail sales were flat in April.
“Potentially, that’s an indication of consumers getting tapped out,” Sedunov said. “At the end of the day, that retail softening is an indicator that maybe there’s going to be less pressure on prices in certain areas going forward, which could have a continuing moderating effect on inflation.”
I assume you mean the average inflation over the last 3 years?
Because for the last 18 months..... since 2023 through June this year...Inflation is growing at the same 3.4% rate as the DOW
According to U.S. Labor Department data published in June 2024, the annual inflation rate for the United States was 3.4% for the 12 months ending April. This is a slight decrease compared to the previous rate of 3.5%1.
To put this in perspective, let’s examine the inflation rates for the past few years:
- 2021: The year-over-year inflation rate was 7.0% at the end of 2021.
- 2022: The rate decreased to 6.5% by the end of 2022.
- 2023: It further declined to 3.4% at the end of 2023
Inflation seems to be cooling again. Americans aren’t buying it
Inflation appears to be coming down after signs of sticking early this year. Americans aren’t convinced it will continue to cool.A slew of big-box retailers have lowered prices on items in recent weeks, citing moderating inflation and frugal customers. Walmart rolled back prices on nearly 7,000 items in its stores. Target slashed prices on more than 1,500 items, ranging from laundry detergent to cat food to sunscreen, with thousands more price cuts expected over the summer. Amazon Fresh is discounting thousands of grocery items. Ikea and Aldi have also reduced prices.
Recent economic data has also suggested that inflation is cooling, after data earlier this year spurred fears that progress had stalled. The latest Consumer Price Index report showed prices rose 3.4% for the 12 months ended in April, easing from 3.5% the prior month. Core CPI, which strips out the more volatile food and energy categories, slowed to 3.6%, its lowest rate since April 2021.
But Americans seem unsure that inflation’s downward trajectory will last. The Conference Board’s latest Consumer Confidence Index released Tuesday revealed that average 12-month inflation projections rose to 5.4%, and the share of consumers that expect higher interest rates in the year ahead climbed to 56.2%.
Link to the rest of the story
Inflation Didn’t Budge In April As Fed’s Favored Gauge Comes In At 2.8%
Topline
Inflation stayed steady in April at a still historically high level, according to new data released Friday, as Americans continue to grapple with sticky price increases, though the fact inflation isn’t getting worse was viewed as a boon by investors.Key Facts
Headline inflation was 2.7% in April, according to the Commerce Department’s personal consumption expenditures index released Friday morning, which measures how much more Americans spent on goods and services in aggregate last month than in April 2023.That’s identical to March’s 2.7% PCE inflation, the same rate average economist forecasts pegged it to come in this month.
Core PCE inflation, the Federal Reserve’s preferred inflation measure as it excludes the more volatile food and energy subindexes, was 2.8% in April.
That’s flat from March, which is also where economists predicted inflation would come in Friday.
Equity and bond traders reacted positively to the data, as S&P futures were up 0.2% shortly after the release and 10-year U.S. Treasury yields dropped three basis points to 4.53%.
Key Background
Core PCE inflation remains well above the Fed’s long-held 2% target. Other than indicating further draining from Americans’ wallets, that’s bad news for investors and corporations hoping for lower interest rates, as central bankers have maintained they need to see to make a significant change in monetary policy, despite the significant optimism pervading the market at the beginning of the year for a bevy of rate cuts in 2024. Rates were initially raised two years ago as inflation roared to its most painful level since the early 1980s, according to both PCE and its sister consumer price index, as higher interest rates typically cool inflation by making borrowing more costly, leading companies to curb hiring and consumers to closely watch their spending. CPI inflation is similarly far above its typical steady-state range, as headline CPI inflation and core CPI inflation were 3.4% and 3.6% in April, respectively.Big Number
36%. That’s how much more Americans spent on goods and services last month than they did in April 2019, according to the PCE index. That compares to a 32% increase in personal income.Inflation cooldown incoming for U.S. economy
Inflation resumed its downward path in April — if ever so slightly — and the white-hot consumer looks to be no more.Why it matters: Should that continue, it might mean the U.S. economy is back on track for a gradual inflation cooldown even if the process is bumpier than initially thought.
Driving the news: The Personal Consumption Expenditures Price Index, the Fed's preferred gauge, showed a slight deceleration in core inflation, with prices excluding food and energy rising 0.2% in April versus 0.3% in February and March.
- The report also said consumer spending rose a modest 0.2% in April, versus 0.7% in both February and March.
- "Slower consumer spending growth, reduced markups, declining rent inflation and moderating wage growth" will keep inflation cooling, even if there is a "temporary plateau," Daco added.
- Over the last three months, core PCE rose at an annualized rate of 3.5%, pulling back from the 4.4% in March.
- But for all of 2024, core inflation is running at a 4.1% annualized pace — well above the Fed's 2% target, and key evidence for why officials will still be cautious about lowering interest rates.
- "Businesses need to prepare for an environment where consumers are not splurging like they were last year," LPL Financial chief economist Jeffrey Roach wrote in a note.
- Meanwhile, wages did not rise as quickly as inflation did: Real disposable incomes fell 0.1%, the second such decline in three months.
- The personal saving rate — that is, how much income is left after spending — held at 3.6%, a level lower than in pre-pandemic times.
US inflation up moderately in April, consumer spending weakens
(Reuters) -U.S. inflation tracked sideways in April and consumer spending weakened, mixed signals for the Federal Reserve that provided little clarity on whether the U.S. central bank will be able to begin cutting interest rates in September.
The data suggested the elevated pace of price increases could last longer than expected but also the prospect that more tepid consumer spending may keep a lid on prices increases in the months ahead.
"People have been pinched for a while, and it's likely starting to show ... This cooling is encouraging for slower inflation in the coming months," said Elizabeth Renter, a senior economist at NerdWallet.
The personal consumption expenditures (PCE) price index increased 0.3% last month, the Commerce Department's Bureau of Economic Analysis said on Friday, matching the unrevised gain in March.
In the 12 months through April, the PCE price index rose 2.7% after advancing at the same pace in March. Economists polled by Reuters had forecast it would climb 0.3% on the month and 2.7% on a year-on-year basis. The PCE price index is one of the inflation measures tracked by the U.S. central bank for its 2% target. Monthly inflation readings of 0.2% over time are needed to bring inflation back to target.
Inflation rises moderately in April, spending slows
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased by 0.2% in April after a downwardly revised 0.7% rise in March. Revised gross domestic product data released on Thursday showed consumer spending moderating to a 2.0% pace in the first
Yields on U.S. Treasury securities fell to their lowest levels in about two weeks following the release of the inflation report on Friday, while stocks reversed early gains and slid for a third consecutive day. The dollar was broadly weaker.
Traders of futures tied to the Fed policy rate added to bets of roughly even odds that the central bank will begin to cut rates in September and boosted the odds of a second rate cut in December to about the same probability.
Goods prices increased 0.2% in April after edging up 0.1% in the prior month, the PCE report showed. Services prices rose 0.3%, down from 0.4% in March. Housing and utilities remained the largest contributors to last month's increase. Energy prices rose 1.2% and food prices decreased 0.2%.
The Fed has kept its benchmark policy rate in the 5.25%-5.50% range for the past 10 months, having been stung by several stronger-than-expected inflation and labor market readings this year after more encouraging data in the fourth quarter of last year. While inflation still remains sticky, job gains in April were at the lowest level in six months.
REAL SPENDING FALLS
The Fed has raised borrowing costs by 525 basis points since March 2022 in a bid to cool demand across the economy. Financial markets initially expected the first rate cut to come in March, which then got pushed to June and now to September.
Stripping out the volatile food and energy components, the PCE price index increased 0.2% in April after rising 0.3% in March. Core inflation increased 2.8% on a year-on-year basis in April, matching March's advance.
PCE services inflation excluding energy and housing rose 0.3% after a 0.4% gain in March. Policymakers are closely monitoring the "super core" inflation to gauge their progress in fighting inflation.
Inflation-adjusted personal spending declined 0.1% in April, after an increase of 0.4% in March. That reflected a 0.4% decrease in real goods spending in April, down sharply from a 0.9% increase in March, and a 0.1% rise in real services spending, down from a 0.2% increase in the prior month.
"We are in a be-careful-what-you-wish-for moment," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, about the pullback in consumer spending and its potential to lead to lower inflation. "If ... the Fed is able to cut slowly as a result, then that will be good for markets. However, if consumer spending – and the economy – slows too quickly, then corporate profits and stock prices will go down much more quickly than the Fed will be able to cut rates."
Key Fed Inflation Rate Falls, Lifting Rate-Cut Hopes; S&P 500 Slips
The primary Federal Reserve inflation gauge cooled in April, raising hopes for a rate cut as soon as September. Yet for a second day in a row, the S&P 500 is failing to hold gains on soothing economic data.Primary Fed Inflation Rate
The personal consumption expenditures, or PCE, price index rose 0.3% in April, in line with estimates. The 12-month headline inflation rate held at 2.7%, as expected.Typically, Federal Reserve decision-making puts more weight on core inflation, which strips out volatile food and energy prices. The core PCE price index rose 0.2% in April, matching forecasts and the smallest increase so far this year.
The 12-month core inflation rate held at 2.8%, as expected.
On an unrounded basis, the core PCE price index rose 0.249%. At first blush, that's not as benign as the 0.2% reading. However, the big picture looks better. Thanks partly to downward revisions to first-quarter inflation data, the Fed's primary core inflation rate registered 2.75% over the past 12 months, which rounded up to 2.8%.
Core inflation hasn't been this low since March 2021.
Supercore Services Inflation
Still, the April inflation data showed that more progress is needed to bring down what Wall Street now calls supercore inflation. This metric unveiled by Federal Reserve chair Jerome Powell in late 2022 measures changes in core service prices excluding housing. This narrower view of price changes was in keeping with the Fed's worry that the tight labor market and elevated wage growth had been at the root of stubbornly high inflation. Wages make up a high percentage of costs for service businesses. Therefore, supercore services inflation should ease as wage pressures moderate.In April, prices for these core nonhousing services, including health care, haircuts and hospitality, rose 0.265% on the month, after a 0.4% increase in February.
The 12-month supercore services inflation rate dipped to 3.4% from 3.5% in March, but though it is up from 3.3% at the end of 2023.
Personal Income, Spending
The PCE price index is released with the Commerce Department's monthly personal income and outlays report. Personal income rose 0.3%, matching forecasts. Personal consumption expenditures rose 0.2% in April, below 0.3% estimates. That followed back-to-back gains of 0.7%.Adjusted for inflation, consumer outlays dipped 0.1% in April. That could lead economists to lower Q2 GDP growth estimates, after tepid 1.3% growth in Q1.
Federal Reserve Rate-Cut Outlook
After April's core PCE inflation data, market pricing showed 50.5% odds that the first Fed rate cut will come by the Sept. 18 policy meeting, up slightly from 49% ahead of the report.Markets now see 58% odds of no more than one quarter-point rate cut for the full year, down slightly from 60%. That includes a 17% chance that the Fed will leave rates steady.
S&P 500
The S&P 500 rose modestly in early Friday stock market action, but turned lower mid-morning, falling 0.5%. The S&P 500 is trying to avert a three-session losing streak. On Thursday, the S&P 500 slipped 0.6%, finishing 1.6% below its May 21 record closing high.The combination of cooler core inflation and soft consumption in April sent the 10-year Treasury yield down five basis points to 4.5%.
Yet investors may be paying more attention to tech-sector news than economic data at the moment. On Thursday afternoon, the S&P 500 turned lower after a report that the Biden administration is hitting the brakes on AI chip sales to the Middle East. A soft outlook from Dell Technologies dampened enthusiasm on Friday.
