Before The Bell
Stock futures are mixed this morning, but we expect trading today to confirm a trend that has taken hold over the past several weeks: technology issues have lost their luster, and investors are paying more attention to both economically-sensitive cyclical and value equities. Notably, the Dow Jones Industrial Average is standing up well to a pick-up in market volatility, better so than the S&P 500 Index and the tech-heavy NASDAQ.
Early today, all eyes were on the Labor Department’s jobs report for December. Economists expected a strengthening of employer job additions to more than 400,000, but the figure came in at 199,000. Despite the miss, the unemployment rate moved down, to 3.9% from 4.2%, and the labor participation rate rose slightly to 61.9%. It’s important to note that the Labor Department data is as of mid-December, so the impact from recent spikes in cases of the Omicron variant of the coronavirus was not factored in. Domestic businesses and local governments remain loath to implement strict lockdown measures, given their harsh effects on economic activity, but many schools and offices have had no choice but to scale back operations, or even close, due to staff calling in sick. Disruptions from Omicron are expected to peak this month and then begin to slowly dissipate.
November consumer credit figures are due out this afternoon. Expectations are that the credit totals declined from very favorable October levels, when consumers made their holiday purchases early to avoid potential delivery issues stemming from supply-chain inefficiencies. Nonetheless, we expect the November data to be strong, likely surpassing solid September figures. Assuming no negative surprises, the credit report ought to provide additional stock-market support. That would be welcome, after Wednesday’s release of the Federal Reserve’s December meeting minutes highlighted officials’ discussions of raising short-term interest rates and possibly reducing the central bank’s bond balances and led to a sharp pullback in stocks.
Investors’ rotation out of tech stocks in favor of cyclicals and value holdings is coming into sharper focus. Hedge-fund strategy shifts have been rather pronounced lately, and individual investors have taken note. As 2021 rolled into 2022, many market participants sold their risky high-flying tech issues, such as the dating/social platform Bumble Inc. (BMBL), cloud-security company Zscaler, Inc. (ZS), and software developer Datadog, Inc. (DDOG), locking in some nice gains in many, but not all, instances. They now appear to be using the cash proceeds to purchase safer stocks that are more closely linked to the prospects of the general economy, such as diversified industrial 3M Company (MMM) and retailers Target Corp. (TGT) and TJX Companies (TJX). That said, we note investors are monitoring tech issues for any bargains. The stocks of software and cloud-computing companies Microsoft Corp. (MSFT) and Oracle Corp. (ORCL) have come under pressure, and a further softening of share prices in the coming months could be very tempting. On balance, we believe available cash would best be placed with energy (e.g., Hess Corp., HES), financial (Morgan Stanley, MS), industrial (General Motors, GM), and healthcare (Stryker Corp., SYK) equities in 2022.
– David Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
