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Stock Market: Dow Up, Nasdaq Down as Fed Inflation Gauge Shows Slow Progress

2024-11-27

US stocks witnessed a divergence on Wednesday as investors analyzed fresh data indicating that inflation made minimal progress towards the Fed's 2% target in October. This development came after the S&P 500 (^GSPC) reached record highs on Tuesday but then fell by about 0.3%, while the Dow Jones Industrial Average (^DJI) remained just above the flat line. The tech-heavy Nasdaq Composite (^IXIC) dropped by approximately 0.9%. In the lead-up to the Thanksgiving holiday, the market mood was relatively muted, with markets closing on Thursday and having an early close on Friday. However, the Fed once again took the center stage after being overshadowed by the debate surrounding President-elect Donald Trump's tariff plans and Cabinet choices.

Inflation Gauge and Its Implications

The latest reading of the Federal Reserve's preferred inflation gauge showed that price increases remained flat in October compared to the previous month. This raised questions about whether the progress towards the central bank's 2% goal had stalled. The core Personal Consumption Expenditures (PCE) index, which excludes food and energy costs and is closely monitored by the Fed, rose by 0.3% from the previous month in October, in line with Wall Street's expectations and the reading from September. Over the past year, core prices increased by 2.8%, which was in line with Wall Street's expectations but higher than the 2.7% seen in September. On a yearly basis, the overall PCE increased by 2.3%, showing a pickup from the 2.1% in September.

Impact on the Fed's Rate Decisions

Traders currently anticipate a roughly 34% chance that the Fed will hold rates steady at its upcoming meeting, up from about 24% a month earlier, according to the CME FedWatch Tool. This indicates that the inflation data is influencing the Fed's stance on interest rates. If inflation continues to show signs of stalling or not meeting the 2% target, the Fed may be more inclined to keep rates steady or even consider lowering them in the future.

Corporate Earnings and Market Reactions

On the corporate front, Dell (DELL) shares plummeted by over 10% after its quarterly revenue fell short due to weakening PC demand. Peer HP's (HPQ) stock also declined by more than 10% after its earnings. These declines highlight the challenges faced by some companies in a changing economic environment. However, Dell Technologies (DELL) shares dropped more than 13% early Wednesday after the company adopted a cautious approach to its forecast for investors and warned that AI growth "will not be linear." Despite this, Dell executives and analysts pointed to pent-up demand for its AI servers using Nvidia's (NVDA) latest Blackwell AI chips.

Job Market and Unemployment Claims

New data released by the Department of Labor on Wednesday showed that jobless claims reached a seven-month low in the week ending November 23, with 213,000 initial claims filed. This is down from the 215,000 the previous week and below the 215,000 economists had predicted. "We are in a 'low-hire, low-fire' environment," Bank of America's lead economist Aditya Bhave said in a note on Tuesday. "In the spring of 2022, there were two open jobs for every unemployed person. Now that figure is just a little more than one. In other words, there aren't as many opportunities out there." Recent data has supported this trend, with job openings for September falling to their lowest level since January 2021 and the quits rate, a sign of worker confidence, dropping to 1.9% from a revised 2% in August. Despite the slowdown in the labor market, layoffs have remained low, with the unemployment rate still hovering at a healthy 4.1%.

Stock Market Sentiment and Future Outlook

US stocks paused near record highs on Wednesday as investors awaited the release of the Federal Reserve's favorite inflation gauge to gain insights into the path of interest rates. After reaching record highs on Tuesday, the S&P 500 (^GSPC) fell by about 0.2% at the opening, while the Dow Jones Industrial Average (^DJI) rose by 0.1%. The tech-heavy Nasdaq Composite (^IXIC) dropped by about 0.3%. The October print of the Fed's preferred inflation gauge, the Personal Consumption Expenditures index, is scheduled for release at 10 a.m. ET on Wednesday. Economists expect the annual "core" PCE, which excludes food and energy, to have reached 2.8% in October, up from the 2.7% in September.

Wall Street Strategists' Views

Another Wall Street strategist sees a favorable backdrop for the US economy and a broadening corporate earnings picture driving stocks higher in the coming year. JPMorgan's global equity strategy team led by Dubravko Lakos-Bujas expects the S&P 500 (^GSPC) to reach 6,500 by the end of 2025, joining the likes of Goldman Sachs and Morgan Stanley, who have issued the same target. The target represents an approximately 8% increase from current levels. Lakos-Bujas wrote that continued "US exceptionalism," ongoing earnings growth, and interest rate cuts from the Federal Reserve will be tailwinds for stocks in the next year. He argued that the US is likely to remain the "global growth engine" with a booming business cycle, a healthy labor market, a broadening of AI-related capital spending, and the potential for robust capital market and deal activity. He added that heightened geopolitical uncertainty and the evolving policy agenda are introducing unusual complexity to the outlook, but opportunities are likely to outweigh risks. The benefits of deregulation and a more business-friendly environment are likely to be underestimated, along with the potential for unlocking productivity gains and capital deployment.