This morning, the attention of Wall Street is once again on the U.S. economy. At 8:30 A.M. (EST), the Commerce Department reported new residential construction data that showed year-over-year respective declines of 21.8% and 29.9% in December housing starts and building permits. These metrics, which are strong indicators of future residential construction activity, reflect the impact of higher borrowing costs—resulting from the Federal Reserve’s increasingly restrictive monetary policies—on housing affordability and demand for homes. We also learned from the Labor Department that initial unemployment claims for the week ending January 14th totaled 190,000, which was down 15,000 from the previous week’s unrevised figure. The equity futures, which were lower heading into the economic releases, are still indicating a selloff at the opening bell.
The new trading day also brings the release of some quarterly data from Corporate America. Of note, shares of Discovery Financial Services (DFS) are trading lower in pre-market action after the company surpassed Wall Street’s expectations in the fourth quarter, but warned that customers were falling behind on payments, which will likely lead to an increase in loan defaults in the coming months. The banking and credit-card provider said it had set aside $883 million for potential credit losses during the quarter, up $620 million from the same quarter last year. Then this morning, consumer goods producer and Dow-30 component Procter & Gamble (PG) reported revenue and earnings results that were in line with the Street’s estimates, but down year over year. The company also noted that volume was softer than expected. Shares of P&G are pointing to a lower opening today.
After the close of trading this afternoon, investors will be keenly watching the latest quarterly results from streaming giant and original content producer Netflix (NFLX). This may provide a glimpse into how the new line technology companies will fare during the fourth-quarter earnings season, which will heat up next week. This week, shares of Goldman Sachs (GS) fell sharply on a significant drop in earnings per share at the bank.
Wall Street also will be keeping an eye on today’s looming debt ceiling deadline. The debt ceiling is the maximum amount the U.S. government can spend on its existing obligations, including Social Security and salaries for military personnel. Without a higher ceiling, the government would have to default on bills incurred that it has already committed to pay. This could cause agencies of the government to shut down and put the nation’s debt ratings at risk. This uncertainty is adding to the volatility expected at the start of trading today.
Meantime, the market sold off yesterday despite a report from the Labor Department showing a 0.5% drop in the Producer Price Index (PPI) last month. This followed a 0.1% decline in the December Consumer Price Index and a more-modest increase in December average hourly wages. The benign inflation readings are an indication that the Fed’s efforts to slow demand and ultimately push down prices are working. The question is whether these restrictive monetary policies in place will push the economy into recession. On point, the Federal Reserve’s Beige Book summation of economic conditions showed economic activity was unchanged last month, and the central bank’s outlook calls for little growth in the coming months.
The economic data this week, including the aforementioned residential construction figures, have been very weak. Of note, industrial production and capacity utilization fell sharply last month, while retail sales fell sharply in December, which included the bulk of spending during the holiday shopping season. The retail sales report is quite alarming, as the consumer has been the main growth engine for the economy over the last 12 months. If the consumer sector starts to sputter, it may bring down the economy this year and produce the recession that the inverted Treasury market yield curve has been suggesting for the better part of the last year.
So what is an investor to do in this uncertain backdrop for the U.S. economy? Our sense is that the U.S. economy is headed into a recession and whether it turns out to be a soft or hard landing, we still think some economic pain lies ahead, with the Fed raising rates into a period of slowing growth. In this environment, which will likely include a decline in corporate earnings over the next few quarters, we recommend looking at the stocks of companies that have demonstrated an ability to produce steady earnings and cash flows in tougher economic times, while maintaining their dividend payouts. In volatile stretches for the equity market, the stocks ranked 1 (Highest) and 2 (Above Average) for Safety by Value Line have relatively outperformed the broader market averages. Value Line’s stock-screening capabilities make it easy for subscribers to identify these high-quality equities. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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