Why are stocks up today? The release of the Personal Consumption Expenditures (PCE) index printed a generally favorable report. As the Federal Reserve’s preferred dataset for gauging inflation — excluding typically volatile food and energy prices — the PCE takes into account variability in consumer spending habits. The most recent PCE report demonstrated slowing rises in price. However, recession fears are still abound.
According to the Bureau of Economic Analysis (BEA), the PCE index (demonstrating the annual increase in prices) touched 5% in December. This figure was a noticeable decrease from the 5.5% seen in November. On top of that, the decline demonstrates a clear negative trend for the pace of inflation. The PCE stood at 6.1% in October and 6.3% in September.
Getting down into the details of the December report, the cost of goods and services also increased only 0.1% from November. Per CNN Business, on a month-to-month basis, “prices for goods decreased 0.7% and prices for services increased 0.5%.” Further, within those categories, “food prices increased 0.2% and energy prices decreased 5.1%.”
On the surface, those questioning why are stocks up today can point to the Fed’s aggressive rate hikes throughout 2022. True, higher rates equate to higher borrowing costs, which disincentivizes growth-based ambitions. But as MarketWatch notes, the “increase in the core rate of inflation in the past 12 months decelerated to 4.4% from 4.7%,” marking the lowest level in 14 months. Therefore, the Fed may soon relax its monetary tightening strategy.
If that is the case, growth incentives could also return, potentially kickstarting the economy at a relatively normal inflation rate. Still, specters of a recession loom large.
Why Are Stocks Up Today Despite a Hit to the Consumer?
The slowing PCE index certainly boded well for investor sentiment, but many may still be asking: why are stocks up? Although the major equity indices technically printed their wares in green, their hue has conspicuously faded relative to prior sessions. Unfortunately, the reality is the Fed has a lot of work left to do.
As MarketWatch points out, “If rates go too high, the economy could sink into recession.” That’s exactly what’s preventing many analysts from broadcasting gung-ho targets for equities and the broader economy. CNN Business summarized this concerning backdrop well:
“Through much of 2022, consumer spending remained robust in spite of high inflation, rising interest rates, and simmering recession fears. However, as the months dragged on, economic data suggested that consumers were running out of dry powder: Reliance on credit grew and delinquencies started to tick up, while savings levels declined.”
Lydia Boussour, Senior Economist for EY Parthenon, says the increase in the personal saving rate from its September 2022 low is “a sign that consumers are growing cautious after rapidly drawing down their savings last year.” Nasdaq IR Intelligence Senior Analyst Massud Ghaussy says the labor market may play a major role in consumer sentiment as well:
“The big question this year so far is, ‘is the jobs market the next shoe to fall?’ […] The economic picture is still quite murky, and the reason why we’re seeing consumer confidence still relatively strong is because of a strong job market.”
Thus, the answer to the main question ahead of the weekend — why stocks are up — could come down to cautious confidence in the Fed to engineer a balancing act.
Why It Matters
The discussion about why stocks are up today also centers on velocity. Put simply, cause and effect do not always align in the same span of time. As MarketWatch points out, the impact of last year’s aggressive rate hikes “are just starting to bite.”
Further, it’s important for investors to not get too complacent about slowing inflation. As CNN Business also notes, China’s reopening doesn’t bode holistically well for the global economy. With greater activity comes more energy consumption. That could potentially lead to a “second wind” of inflation.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
