Some good economic news this week may have made the market’s questionable outlook more positive.
The good news began with Tuesday’s Producer Price Index (PPI), which is a similar inflation measure to Consumer Price Index (CPI), but with a focus on producers and businesses.
On a month-over-month basis, core PPI (excluding food and energy) was 0.00%. This number is a good measure of inflation because – according to Investing.com – when producers pay more for goods and services, they are more likely to pass the higher costs to the consumer. A higher-than-expected reading should be taken as a positive/bullish indicator for the U.S. dollar, while a lower-than-expected reading should be considered bearish.
This flat 0.00% shows that we’re in a true neutral area – at least on a producer-consumer basis. While that doesn’t mean we’re on a new bullish path, anything that isn’t a blaring negative indicator is good news.
Also on Tuesday, the Fed’s Empire manufacturing report was released. Most analysts (including us) expected to hear that manufacturing activity had continued to contract.
However, the numbers showed expansion instead. Traders seem to have used the economic reports to justify a more positive outlook for growth and the Fed’s potential to slow the current pace of rate hikes.
From a technical perspective, this is the perfect time for a little good news; the S&P 500 broke above 3,900 resistance last week and may continue that trend to the upside.
Finally, the trifecta of positive news came on Wednesday with retail sales for the month of October from the U.S. Census Bureau. Core sales (excluding food and energy) are up 1.3% on a month-over-month basis, which is a nice rebound from last month’s bad data and way above expectations.
This leads us to question where the market will go next – and where the next moneymaking opportunities will arise.
Let’s explore…
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What to Do Now
Despite solid consumer numbers, recession fears are still prevalent for 2023.
The data is good; it’s good enough to justify our forecast that support on the major indexes is still solid. However, a big bullish trend needs stronger growth numbers. According to Factset, average analyst expectations are set that the companies of the S&P 500 will report a -1.00% contraction in earnings in the fourth quarter.
If we exclude the energy sector, which has enjoyed windfall profits this year, the S&P 500 already posted an earnings decline in the third quarter.
If the fourth quarter this year turns out to be the nadir of earnings growth rates and the outlook starts to improve in January, then we will have justification for a much better outlook. However, we don’t have that data yet, and until we get the guidance at the end of the fourth quarter, we should remain cautious.
But caution doesn’t imply inaction.
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