Pacific Gas & Electric Co. (PCG) Stock Forecasts

Summary

Worrisome Mid-Year Calm As the final trading week of the first half of 2024 begins, the stock market is in good shape, but investor sentiment appears frayed. Business leaders and consumers are worried about the months ahead, given clear signs of slowing consumer spending, continued sluggish consumer confidence and the looming election. Technically, the stock market appears to be in need of a shake-up. It’s not all doom and gloom. The upcoming earnings season will likely be the best in at least two years. Accelerating earnings growth keeps the market from sinking into deep overvaluation territory, even as stocks repeatedly reach new highs. Although economic activity may have slowed from 2022-2023 levels, stabilizing global supply chains means the U.S. economy could send more accurate signals and operate at a more sustainable level of activity . And notably, recent inflation data (CPI and PPI) finally showed improvement from recently locked-in levels. Mixed signals from the economy The main driver of economic activity in the United States remains the consumer, responsible for more than two-thirds of final sales. After propping up the economy through the pandemic, the supply chain crisis and the Fed’s rate hike cycle, the consumer is finally showing signs of exhaustion. Retail sales in May were poor for the second consecutive month. April retail sales, initially reported as unchanged from March levels, were revised down 0.2% month over month. Economists had expected a 0.3% recovery in May from April’s low levels; instead, retail sales rose just 0.1%. On an annual basis, retail sales increased by 2.3%; this is down from steady 5- to single-digit annual growth in 2023. According to the Commerce Department, this weakness partly reflects a 2.2% drop in sales at gas stations due to of the drop in gasoline prices. Sales of auto vehicles and parts increased 8%. Sales also improved in clothing stores as well as sporting goods, leisure goods, books and musical instruments. Non-store retail (e-commerce) continues to outperform physical retail, up 0.8% in May and 6.8% year-over-year. On the other hand, industrial production showed a vigorous recovery in May. Industrial production rose 0.9% month over month, much better than the consensus forecast of 0.3% and up from 0.0% in April. Manufacturing production rebounded to 0.9% after a 0.3% decline in April. And capacity utilization in May was 78.7%, still below the long-term average but up half a point from April. Offsetting weak mining output, utility output is expected to keep overall industrial production high during the hot summer months. Besides GDP, the Leading Indicator Index (LEI) is one of the few indicators straddling the business and consumer economy. According to the Conference Board, May’s LEI fell 0.5%, mainly due to a drop in new orders, weak consumer confidence and fewer building permits. The six-month trend in LEI is down 2.0%, actually an improvement from the 3.4% decline in the previous six-month period. According to the Conference Board, the LEI’s six-month trend does not currently signal a recession despite its “decidedly negative” tone. As indicated previously, the real estate economy constitutes a permanent brake on the LEI. Based on SAAR (seasonally adjusted annual rate), existing and new home sales are currently at around 60-65% of the peak levels reached from late 2020 to 2021-2022. Existing home sales, which reached a peak SAAR of 6.6 million in January 2021 and still stood at 6.43 million a year later in January 2022. The most recent figure from May 2023 showed the SAAR of existing housing units at 4.11 million, or 62% of the peak. level. New home sales reached a peak SAAR of 1.03 million in October 2020, as the migration of young millennial families from cities to suburbs reached its peak. In April 2024, the SAAR of new housing, of 634,000, also reached 62% of its maximum level. The SAAR of new housing actually reached its lowest level at 519,000 in July 2022, which coincided with the inflation peak of June 2022. With the exception of house prices, most other indicators of the real estate economy are well below past peaks. Housing starts and permits peaked during the 2020-2021 period, with permits for all of 2021 reaching 1.74 million. The most recent SAAR permits, from May 2024, were 1.39 million. Housing starts, which peaked around 1.60 million in 2021, were reported at a SAAR of 1.28 million for May 2024. The Housing Market Index compiled by the National Association of Homebuilders (NAHB) and Wells Fargo hit the high 70% range in fall 2020, peaked at 90 in November 2020, and remained in the mid-80s to low 70s through early 2022. As of June 2024, the The NAHB Housing Market Index was at 43. Although this is also low for 2024, this series actually bottomed out in the 30s by the end of 2022. The volatility of the housing market index, in our view, reflects manufacturers’ premature expectations and disappointment with the timing of the Fed’s first rate cut. Waiting for the Fed Like manufacturers, consumers, investors and just about everyone else depends on when the Fed will make its first rate cut of the cycle. Argus bond strategist Kevin Heal assessing Fed ratings