Stock futures today point to a lower opening for the major domestic stock market indexes. Share-price volatility has notably picked up, as investors decided to keep paring their equities holdings following this week’s deluge of economic news and data. Most prominently, on Wednesday, Federal Reserve Chairman Jerome Powell indicated a hawkish stance toward near-term monetary policy. It appears that the Fed will stop adding to its balance sheet of debt securities and begin to raise short-term interest rates in March. (The balance sheet could be reduced thereafter.) In other words, the central bank is removing liquidity from the economy, including easy access to borrowing, with the aim of reigning in inflation. A healthy economy, as evidenced by very good Gross Domestic Product growth of 6.9% reported for the fourth quarter of 2021 and an unemployment rate of 3.9%, make it easier to argue for such a hawkish stance. Furthermore, the current earnings season has turned out to be rather favorable; a clear majority of companies have beaten Wall Street expectations.
After the markets closed on Thursday, smartphone and tablet manufacturer Apple (AAPL) reported strong revenues and earnings for the December quarter. Management’s positive guidance for the rest of this year provided some cheer for investors, given the weak overall stock market performance thus far this year. This morning, market participants are reviewing Caterpillar’s (CAT) solid recent sales and earnings figures, as well as the company’s business outlook, to get a better gauge of how the economy is faring. The heavy equipment maker has warned that higher costs and expenses will weigh on March quarter results. More broadly, newly released December consumer spending numbers displayed some softness due to disruptions from the Omicron variant of the coronavirus, as well as supply-chain problems and high inflation. However, assuming cases of Omicron continue to decline, we expect job participation to improve and supply shortfalls to slowly correct, while inflation should start to ease as the Fed removes liquidity from the economy.
At this time, we like stocks in the energy, materials, industrial, and financial sectors. Durable goods demand should remain firm, at least through the end of this year, while commercial and personal loan volume will probably track higher in the coming months. We believe that with the help of the Federal Reserve, an inverted yield curve (i.e., when rates on short-term debt exceed those on long-term borrowings) will be avoided; inversion is typically an indicator of a coming recession. However, stock market volatility may well be elevated over the next few months, and the trend favoring conservative, large capitalization issues over risker stocks, particularly those in the tech sector, continues to hold true. We advise investors to selectively commit to equities in companies with proven profitable growth and modest valuations.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
