Economy Rests on the Consumer | The Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Apple Takes Flight

With all the talk about Artificial Intelligence and the #1 stock market beneficiary – AI chipmaker NVIDIA – investors had seemingly forgotten about Apple.

And for good reason – the stock has been basically flat for the past year even as the broader stock market has done rather well.

That all changed this past week as Apple stock blasted off, rising more than 10% in just two trading days in the wake of the company’s Worldwide Developers Conference.

On Monday Apple revealed its AI strategy in a keynote at the conference.  Starting this fall, it’s adding a little bit of AI — which it is calling “Apple Intelligence” — to many of its core apps and devices.

The stock’s initial reaction was one of disappointment as shares fell modestly during and immediately following the presentation.  After sleeping on it, investors did a complete about face – sending the shares 7% higher the next day, followed by a 3% gain the day after that.

Only time will tell if Apple’s AI-hype will have staying power, but the stock is looking a bit pricey at these levels.

Featured Insight: Momentum is Powerful

Traditional investors like to look at fundamental metrics like revenue, earnings, and dividends relative to a stock’s price to decide whether or not it’s a good buy, and that’s certainly a prudent approach.

It can be confounding, however, when some stocks defy gravity to fly to heights that make little rational sense relative to their underlying fundamentals.

Economist John Maynard Keynes is credited with saying that markets can remain irrational longer than you can remain solvent.

What he implies in his quote is that market momentum is a powerful force.

Many investors buy stocks simply because their price is going up, or sell stocks simply because the price is going down – either way this dynamic causes the prevailing trend to persist – sometimes much longer than would seem logical based on fundamental analysis.

It’s important to understand the fundamentals, so long as you also respect the power of momentum in the markets.

Looking Ahead: Economy Rests on the Consumer

The U.S. consumer is a powerful force. Consumer spending makes up about 70% of the American economy, and our consumers know how to spend.

The last few years have been strong in terms of consumer spending, although inflation has certainly been a headwind.  We’re making progress on that front, but the cumulative effects of past inflation aren’t going away.

Now, with excess savings from pandemic-era stimulus largely spent down and lines of credit reaching their limits along with much higher interest rates, the next six months will be a big test to see if the consumer can hang in there.

We’ll get some data on the consumer next week with the monthly retail sales numbers for May.  Retail sales are expected to be flat month-over-month, and up 0.2% if you exclude autos.

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