Before The Bell
Stock market futures were down this morning, following sustained downward pressure on the major equities indexes over the past few days. Investors are aggressively reallocating funds within their individual portfolios; high-flying tech issues have lost favor, while more investment money has gone towards large-cap value stocks. Share-price volatility has also perked up. On Thursday, the Labor Department released higher-than-expected initial unemployment claims figures for the week ended January 15th. Jobless claims totaled 238,000, compared to the experts’ outlook for 225,000. We attribute the employment weakness to disruptions caused by the Omicron variant of the coronavirus. On a positive note, indications are that viral cases have peaked and are now beginning to trend lower, auguring well for business activity in the months ahead. However, the disappointing job news led to market losses for the day.
This morning, the Conference Board is scheduled to report leading economic indicator data for the month of December. Data was quite good in November, but the effects of Omicron lend a degree of uncertainty as to how strong the figures were last month. With the number of illnesses reaching highs early this year, January economic data may be uninspiring as well. Assuming cases trend in the right direction in the coming weeks and months, however, business activity should firm. Still, companies will likely have to deal with worker shortages and supply-chain inefficiencies, at least over the near term. We also expect wage and materials inflation to remain a problem. The Federal Reserve is closely monitoring the situation, as are investors. In the earnings season now under way, managements will provide guidance for the remainder of 2022, which will surely have an impact on the direction of the stock market. In its efforts to fight inflation, the Fed will try to tighten monetary policy without significantly harming economic growth, but any serious missteps could prompt investors to further accelerate portfolio moves.
Prominent tech issues are in focus. Though entertainment streaming company Netflix (NFLX) announced solid fourth-quarter operating results, a conservative subscriber growth outlook pressured its share price. Also noteworthy, Microsoft (MSFT) will release fiscal second-quarter earnings on Tuesday. The share price of the Redmond, Washington-based software company has displayed some weakness since mid-November. Investors are concerned that rising inflation will erode the quality of future earnings growth. A deal to acquire video game publisher Activision Blizzard (ATVI) for $75 billion also stressed Microsoft’s quotation, as is common in such instances given the associated asset integration risks. Good-quality techs, including NFLX and MSFT, are becoming more attractive as their valuations slide under a broader re-pricing of the stock market. That said, the slide might not yet be over, and at this juncture, we believe investors would be best served by more conservative, dividend-paying large cap issues, such as those in the energy, industrial, and consumer staples sectors; examples are: ExxonMobil (XOM), Honeywell International (HON), and Procter & Gamble (PG).
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
