VIDEO: “Fed Air” Executes a Soft Landing

Welcome to my latest video presentation. The article below is a condensed transcript; the video contains additional details and several charts.

Political discourse during this year’s presidential campaign season more closely resembles a WWE SmackDown than any sort of rational debate.

You’re hearing some politicians and pundits rant about the ravages of inflation and the dismal state of the economy. To put it bluntly, this narrative is a lie. Let’s look at the facts and how they affect investors.

The latest data confirm that inflation continues to dramatically fall and the economy is growing. Indeed, Americans last week got further good news on inflation and the economy.

The U.S. Bureau of Economic Analysis (BEA) reported last Friday that the gain in the “core” personal consumption expenditures price index (PCE), which excludes the more volatile costs of food and energy, slowed to 2.9% year over year in December. The core PCE was up 0.2% on a month-over-month basis. The consensus forecast of economists had called for increases of 3% and 0.2%, respectively.

While the general public more closely follows the Labor Department’s consumer price index (CPI), Fed policymakers prefer the PCE because it adjusts for shifts in what consumers actually buy, while the CPI measures prices in the marketplace. Core measures provide a means by which monetary policymakers can separate the noise and short-run fluctuations in the data from the more persistent, underlying trends.

The Fed’s interest rate tightening campaign has curbed inflation, but without causing a recession. The BEA reported on January 25 that “real” (inflation-adjusted) U.S. gross domestic product (GDP) grew 2.5% year-over-year in 2023. Consumers continue to spend, even with Fed interest rates at a 22-year high.

As for corporate earnings, fourth-quarter 2023 operating results have been lackluster and a mixed bag, but they haven’t imploded. For Q4 2023, with 25% of S&P 500 companies reporting actual results as of January 26, 69% of S&P 500 companies have reported a positive earnings per share (EPS) surprise and 68% have reported a positive revenue surprise.

For Q4 2023, the blended year-over-year earnings decline for the S&P 500 is -1.4%. However, if history is any guide, the final numbers will be higher than expectations. What’s more, earnings growth is expected to accelerate in future quarters.

It appears that Jerome Powell’s Fed has engineered a “soft landing” and stocks have been rising accordingly. Last week, the major U.S. equity indices closed higher as follows: the Dow Jones Industrial Average +0.6%; the S&P 500 +1.1%; and the tech-heavy NASDAQ +0.09%.

The benchmark 10-year U.S. Treasury yield (TNX) closed flat for the week, at about 4.1%. It’s significant that the yield has risen past the 4% threshold, largely due to worries that geopolitical strife might disrupt supply chains again. Wall Street is keeping a nervous eye on the TNX.

Crude oil prices jumped 6.6% last week, as Houthi terrorism in the Red Sea causes concerns about the security of shipping lanes (see my video for charts). Economic optimism also is pushing up crude prices.

Oil prices have been on a tear all month, a trend that could put some upward pressure on inflation, but so far the inflationary effects have been muted.

The upshot? Prepare for a soft landing. Strong economic growth, falling inflation, and historically low unemployment are creating the “Goldilocks” scenario that investors like.

Driven by these positive fundamental and technical factors, the benchmark SPDR S&P 500 ETF Trust (SPY) hovers well above its 50- and 200-day moving averages. The broader market is showing considerable upward momentum.

The Week Ahead

These important economic reports are scheduled for release in the coming days:

S&P Case-Shiller home price index, job openings, consumer confidence (Tuesday); ADP employment, Fed interest rate decision (Wednesday); initial jobless claims, S&P U.S. manufacturing PMI, ISM manufacturing (Thursday); U.S. unemployment rate, hourly wages, factory orders, consumer sentiment (Friday).

The most important news will be the Fed’s decision on the fed funds rate. The betting on Wall Street is that the central bank will stand pat.

Editor’s Note: After strong gains in 2023, the stock market continues its winning ways. Looking for an exceptional growth opportunity? Consider the tech giant Apple (NSDQ: AAPL). But I’m not suggesting you actually buy Apple shares.

On Friday, February 2, Apple is scheduled to release its new Vision Pro device, a headset that promises to shake up the virtual/augmented reality (VR/AR) market.

However, the tech analysts at Investing Daily have determined that this new Apple gadget is dependent on mission-critical software made by a tiny, under-the-radar tech innovator. Without the software provided by this small company, Apple’s so-called genius device would be a catastrophic failure.

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I urge you to make your move before February 2. That’s the day Apple rolls out the new Vision Pro device, and if my colleagues are right, that’s when a profit surge could start for their small software partner. Click here to learn more.

John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.