This morning brought some notable reports on the economy and the corporate world. At 8:30 A.M. (EST), the Commerce Department reported that retail sales rose 0.4% in December. Retail sales, excluding automobile sales, climbed 0.4%, which was up from the November tally of 0.2%. The headline figure came in modestly below the consensus forecast of +0.5%. Likewise, initial unemployment claims for the week ending January 11th totaled 217,000, which was up from the prior-week’s revised tally of 203,000, but still indicative of a tight labor market. The Philadelphia Fed also reported that manufacturing activity surged in the greater Philadelphia area in the latest month. When taken together, the reports suggest that the overall economy is still quite healthy.
On the corporate front, the healthcare sector is looking at a lower start this morning. The weakness comes after industry behemoth UnitedHealth Group (UNH) reported disappointing fourth-quarter results, including revenue of $100.81 billion. That total fell short of the consensus expectation of $101.76 billion. On the profit front, UnitedHealth earned an adjusted $6.81 per share in the fourth quarter, compared with estimates of $6.72 per share. Wall Street is concerned about the spike in UnitedHealth's annual medical cost ratio—the percentage of premiums spent on medical care—to 85.5%, compared with 83.2% in 2023. A continued uptick in this ratio would likely have a detrimental impact on the insurer’s future bottom-line performance. The UNH report is weighing on most of the healthcare and healthcare insurance stocks.
The equity futures, which were mixed heading into the economic releases, are still presaging a bifurcated opening when trading kicks off stateside. The Dow 30 is being hurt by the aforementioned UnitedHealth report, while the NASDAQ futures are modestly higher and the S&P 500 Index is looking at a flattish start to the trading day.
The stock market, which started the week on a bearish note, got a shot in the arm from the latest Consumer Price Index (CPI) report yesterday morning. Specifically, the release showed that the December CPI and the core CPI, which excludes the more-volatile food and energy components, rose 0.4% and 0.2%, respectively. On a 12-month basis, the CPI and core CPI increased 2.9% and 3.2%. Although the data showed that the pace of consumer price growth is still running above the Federal Reserve’s target of 2.0%, investors were encouraged by the cooler-than-expected advance in core prices. Treasury yields registered their biggest intraday decline since August after the newly-released consumer inflation data revived hope for more interest-rate cuts this year. This ignited a broad-based spree of buying in the equity market.
Some of the advance, which saw the Dow Jones Industrial Average, the NASDAQ Composite, the broader S&P 500 Index, and the small-cap Russell 2000 climb 1.7%, 2.5%, 1.8%, and 2.0%, respectively, was in response to the increased odds of an interest-rate cut by midyear, and the possibility of a second reduction over the final six months of 2025. Stocks tend to perform better during periods of monetary easing. This possible scenario drove the rally in the stock market, with investors taking on riskier holdings.
A favorable start to fourth-quarter earnings season also brought more buyers to the market. In particular, the big money center and investment banks , including JPMorgan Chase (JPM), Goldman Sachs (GS), and BlackRock (BLK), showed profit results that were viewed positively by Wall Street. That, along with a better-than-expected economic backdrop than most pundits would have anticipated at this point of the economic cycle, supported stocks yesterday. As we have opined here, we think that with borrowing costs likely to remain high this year, a strong profit performance from Corporate America would be needed to justify the market’s elevated price-to-earnings multiple. Clearly, the market liked the start to this reporting season and gobbled up equities. – William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
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