by Peter Jones, CFA
Senior Vice President
Research and Portfolio Management
While market participants were keenly focused on fresh inflation data this week, the Dow Jones Industrial Average crossed another milestone, passing 40,000 for the first time. Whenever the stock market reaches a new territory, we always want to revisit what the world was like when our firm was founded in 1975. When Ferguson Wellman opened its doors, the Dow traded at a price of 616. When you include dividends, if an investor tucked away $10,000 in the Dow on the day Ferguson Wellman opened, today’s value would be more than $2,000,000*. Although the market has, and will always be, a volatile creature, the power of long-term compounding returns never ceases to amaze and remains the key tenet of our long-term disciplined approach to investing. As the famed investor Warren Buffett once said, “The stock market is a device for transferring money from the impatient to the patient.” Patient investors have certainly been rewarded over the last 49 years.
Shifting our focus to the present market, the inflation data released on Wednesday was the central economic news of the week. The headline inflation, standing at 3.4%, has maintained stability over the past few months. 'Core inflation,' which excludes the impact of volatile energy and food prices, recorded a 3.6% rate . . . the slowest pace of price appreciation in three years. It’s important to note that inflation above 3% is still higher than the Fed’s stated target and as such, Chairman Powell is not rushing to cut rates as quickly. We maintain our belief that inflation at these levels will persist, and until further notice, 3% is the new 2%. Consequently, we do not foresee a material change in monetary policy by the end of this year.
Despite the lingering concerns about inflation, the market received a boost as the 10-year U.S. Treasury yield dropped to 4.35%, marking its lowest level in several weeks. Investors welcomed this move, propelling the Dow and the S&P 500 to new all-time highs.
Looking beyond inflation, it's crucial to recognize that corporate profits are the driving force behind the market's long-term health. These profits continue to exceed expectations and grow at a robust pace. With the first quarter’s earnings nearly complete, the projected next twelve-month profit forecasts continue to rise to new highs (chart below). This trend reaffirms the fundamental principle that, over the long-term, stocks follow earnings.
Source: EIKON
Takeaways for the Week
Both the Dow Jones Industrial Average and the S&P 500 reached new all-time highs
Inflation data this week was better than feared, driving interest rates lower
Over the long term, stocks follow earnings … earnings expectations are also at all-time highs
*Investors cannot invest directly in an index.