Market Commentary

For the week ending 3/15/2024

The lede from last week’s commentary was Fed Chairman Jerome Powell’s bi-annual testimony to Congress (from two weeks ago) in which he said that the time to start contemplating rate cuts is “not far.”  Given subsequent developments, Mr. Powell may be feeling he spoke too soon because the major news from last week was the release of the Labor Department’s inflation numbers for consumers and producers.  Both were a bit higher than expected and, unless they reverse course dramatically in the coming months, put the timeline for rate cuts a little farther than “not far.”  In response, stock indices fell slightly for the second week in a row.

The Consumer Price Index (CPI) rose 0.4% m/m in February in line with expectations, while the Core CPI rose 0.4% m/m on expectations of a 0.3% increase, and the same elevated pace as January.  The main culprits were shelter and insurance costs, but apparel also jumped 0.6%.   More concerning for investors, producer prices (PPI) rose 0.6% in February, roughly double consensus estimates and the most in six months. This dampened hopes that lower producer prices, which had been falling steadily in recent months, would continue to flow smoothly to the consumer.

In a somewhat contrary development, consumers slowed down their spending in February.  The Commerce Department reported that retail sales rose 0.6% in February, but the gain missed expectations and was largely due to an increase in gasoline prices.  Notably, online sales also declined 0.1%, marking a sharp deceleration from the 6.4% increase over the past 12 months. Sales at restaurants and bars increased 0.4%, but also at a slower pace, suggesting some growing consumer caution. Indeed, the University of Michigan’s survey of consumer sentiment, released Friday, indicated a modest decline in consumer expectations.

While it’s true that the contradictory implications of higher prices and slower spending make the short-term outlook uncertain, it can just as well be assumed they simply cancel each other out.  And, given how resilient the U.S. economy has been while coping with the highest interest rates we’ve seen in 40 years, that seems the best position to take as we enter a quiet period for the next few weeks.  The Fed policy board will meet this week to consider their stance on interest rates.  The consensus opinion is that they will leave rates unchanged while insisting that everything remains “data dependent.”  That leaves the first quarter’s earnings season as the next likely catalyst for the market.

Since early last year, the Mega-cap tech stocks have been the dominant driver of market gains.  But there is gathering evidence that prices have gotten so high that investors have stopped buying and are instead starting to take profits.  As such, it’s likely we’ll see, at the very least, a consolidation period and, at worst, a modest correction in the top ten.  That is why the upcoming earnings season is so important.  The other 490 companies in the S&P 500 will have to start posting better profits for the indices to move upward, especially since they are not likely to get any help from the Fed in the form of lower interest rates any time soon.

For the week, the Dow Jones fell 8 points to 38,715 (0.0%), the NASDAQ was down 112 points to 15,973 (-0.7%); and the S&P 500 shed 7 points to 5,117 (-0.1%)

Oil rose $3.00 to $81.00/bbl.    Gold was down $25 to $2,160/oz.

And the yield on the 10 yr. Treasury jumped 0.2 to 4.3%.

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