The Fed's Favorite Inflation Report Is in. Here's What We Learned… Dear Reader, Yesterday, we got a fresh look at the latest Personal Consumption Expenditures (PCE) price index reading for August. Now, this comes in the wake of the Federal Reserve’s “pivot” on September 18 – where it announced a “jumbo” key interest rate cut of 0.5%. That was the central bank’s first rate cut since March 2020. And after a slew of economic data this week, the question emerging on the minds of a lot of investors has been... 1) Did the Fed cut rates in time and 2) is another “jumbo” cut needed at its next meeting in November? The good news is that the numbers continued to tick lower, showing that inflation continues to cool. So, in today’s Market 360, we will take a look at what the report said and what it means for the rest of the year. I’ll also tell you how to prepare for the upcoming earnings season as well as give you a preview of the latest Growth Investor Monthly Issue. Let’s dive in... Making Sense of the PCE Numbers Now, before going any further, I want to remind you that this report matters because the PCE is the Fed’s favorite inflation indicator. Specifically, Fed Chair Jerome Powell has made it clear that he and the other Fed members pay close attention to core PCE, which strips out food and energy. He has specifically mentioned that they want this number to be at 2% on an annual basis.
Now, digging into the details of the PCE report… Headline PCE rose 0.1% in August and 2.2% in the past 12 months. That’s the lowest annual increase since February 2021. Economists expected headline PCE of 0.1% on a month-to-month basis and a 2.3% annual pace. Core PCE, which excludes food and energy, climbed 0.1% in August and beat economists’ expectations for a 0.2% increase. Over the past 12 months, core PCE was up 2.7% in the past 12 months – which was in line with what economists were expecting. Overall, we should be happy with the latest inflation data. Folks are beginning to realize what I have been saying for a while, which is that inflation has been well within the Fed’s annual target for a while now, so a key interest rate cut was warranted.
Too Little, Too Late? Now, it will be interesting to see how the Fed responds at its next meeting on November 7. For now, though, the consensus is that there will be a 0.25% rate cut at the November and December Federal Open Market Committee (FOMC) meetings, respectively. But some folks are beginning to speculate whether the Fed may have acted too late. The reality is that the Fed acted because the employment situation has been deteriorating. The unemployment rate has crept up to 4.2%, which isn’t awful, but we don’t want to see it rise too much further. What’s more, we learned this week that The Conference Board’s Consumer Confidence index plunged to 98.7 in September, down from 105.6 in August. That was the biggest drop in three years, so consumers are clearly feeling strained. The bottom line is if the economic data gets weaker, you can expect to hear talks of another “jumbo” 0.5% rate cut growing louder. With that said, though, the latest GDP report showed the U.S. economy hasn’t completely hit the brakes yet. The U.S. economy grew at a 3% annualized rate in the second quarter. That was better than economists’ estimates for 2.9% GDP growth and up from 1.4% GDP growth in the first quarter. So, solid GDP growth coupled with cooling inflation gives the Fed a little more wiggle room at upcoming policy meetings. And whether the Fed opts for another big rate cut or takes it slow with smaller rate cuts, Wall Street remains ecstatic that most of the uncertainty surrounding the Fed has finally dissipated. And that means the stock market should continue to meander higher in the coming weeks and months.
Finishing the Year Strong Now, the market has had an incredibly strong year so far. The S&P 500 has gained about 20%, while the Dow is up 12.3% and the NASDAQ has climbed nearly 21%.
Meanwhile, over at Growth Investor, my Buy List has surged more than 28% year-to-date! The reality is institutional buying pressure has remained robust in fundamentally superior stocks. And that’s why I expect my Growth Investor stocks to continue leading the charge higher as gear up for the third-quarter earnings season, which will kick off in mid-October. My Growth Investor stocks remain characterized by 23.9% average annual sales growth and 469.7% average annual earnings growth. Last quarter, my average Growth Investor stock posted a 27.8% earnings surprise. Considering that our stocks have benefited from positive analyst revisions in the past three months, I expect another wave of strong earnings surprises.
So, in order to ensure my subscribers remain “locked and loaded” for the upcoming quarterly earnings season and the fourth quarter overall, I added one stock to the High-Growth Investments Buy List and one stock to the Elite Dividend Payers Buy List in the latest issue of Growth Investor yesterday.
Our first pick has a history of posting big earnings surprises. In fact, the company has achieved an average earnings surprise of 78.7% in the past four quarters, posting earnings surprises of 100%, 100%, 100% and 14.8%, respectively. And given that analysts have upped earnings estimates by 50% in the past month alone, the company is likely gearing up for another big quarterly earnings surprise. Our other addition earns a coveted AAA rating. In other words, it earns an A-rating in Stock Grader and Dividend Grader, as well as an A Quantitative grade. So, it’s backed by superior fundamentals, a history of rewarding its shareholders and persistent buying pressure. You still have time to learn more about these two picks in the latest issue of Growth Investor. Given that I expect fundamentally superior growth stocks to continue leading the market higher, I expect these new picks – and the rest of the stocks on our Buy List – to finish the year on a strong note!
To learn how to get full access to my new Growth Investor Monthly Issue, click here.
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