Why Are Stocks Down Today?

Stocks are pulling back moderately today after undergoing a huge rally yesterday. Among the prominent stocks down in early trading are Johnson & Johnson (NYSE:JNJ), 3M (NYSE:MMM), and Verizon (NYSE:VZ), all of which reported their fourth-quarter results this morning.

The combination of profit-taking after yesterday’s big gain and investors’ caution ahead of major corporate earnings reports and important economic data due out later this week are likely combining to push stocks down today.

Important Earnings Reports and Crucial Economic Data

Among the major companies reporting their quarterly results in the next few days are tech titans Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), ServiceNow (NYSE:NOW), Intel (NASDAQ:INTC), and IBM (NYSE:IBM).

Also announcing their earnings this week will be Tesla (NASDAQ:TSLA), AT&T (NYSE:T), utility/renewable energy giant NextEra (NYSE:NEE), Mastercard (NYSE:MA), and casino operator Las Vegas Sands (NYSE:LVS). Taken together, the companies’ results will give investors a much better picture of whether the “earnings recession” and the macroeconomic recession forecast by many bears is in the cards.

Speaking of recession,  the Street will also get a much better read on the state of the economy when the government unveils real disposable income and real consumer spending data on Friday morning. Recently, the bears have seized on weak retail spending data, anemic industrial production reports, and a decline of the index of Leading Economic Indicators to argue that the economy is heading for a steep downturn.

However, I believe that those data points don’t necessarily reflect the economy’s true strength because of consumers’ goods-to-services shift and retailers’ resulting inventory glut. The spending and income data and the fourth-quarter GDP reading are also due on Friday. That data should paint a much truer picture of the U.S. economy’s overall health.

Inflation Data, the Fed, and Stocks’ Overall Outlook

Also due to be released on Friday is the “Core PCE price index,” widely referred to as “the Fed’s preferred inflation gauge.” Economists, on average, expect the index to have risen 4.4% year-over-year last month, down from a 4.7% YOY increase in December.

However, the central bank is already widely expected to downshift to a 0.25 percentage point hike at its upcoming meeting which starts on Jan. 31 and is reportedly potentially ready to begin to talk about an upcoming pause of interest-rate hikes. The Fed’s doves appear, at long last, appear to be ascendant. I believe that it would take a much-hotter-than-expected inflation reading on Friday to shift that dynamic.

Meanwhile, based on continued strong employment data, banks’ generally upbeat fourth-quarter results and comments, and the continued travel boom, I believe that consumer spending will remain generally healthy, enabling the economy to increase at annual rates of at least 1%-2%.

On CNBC yesterday, one market research firm, Renaissance Macro, was quoted as saying that the “Fed is stopping into better [than expected] growth.” I agree with that assessment, and I believe that the combination should be very good for stocks.

On the date of publication, Larry Ramer did not have (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.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.

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