The U.S. stock market could find some stability today, after last week's choppy performance. On Friday, traders became unhinged after a relatively strong employment report suggested that the economy was not slowing much, and that the U.S. Federal Reserve’s aggressive path of raising interest rates would likely continue. ;
This week investors are likely to continue their focus on the inflationary challenges gripping the nation. Attention will be paid to scheduled remarks of Fed officials speaking publicly over the next several days. Moreover, the Producer Price Index (PPI) for the month of September will be released on Wednesday, followed by the Consumer Price Index (CPI) on Thursday. Analysts will be paying particular attention to these reports, as they provide a broad measure of inflation. Some investors are probably hoping that the latest information will show that price pressures have peaked, and are starting to ease. However, it must be noted that inflation is still probably at levels that are too elevated for the central bank to ignore. The Fed has already implied that it intends to raise interest rates another 75 basis points at the November meeting of its Federal Open Market Committee (FOMC), and it is unlikely that it will veer from its recent agenda. Of note, the central bank's credibility is on the line, especially after it incorrectly dubbed the nation's inflationary problems "transitory", and delayed taking decisive action late last year. Nonetheless, the Fed could soften its tone, and possibly signal that it might take a less aggressive approach in future months while monitoring the situation.
In the corporate arena, the third-quarter earnings season commences this week. The financial companies will be the first to report. In the days ahead, we will receive results from Wells Fargo (WFC), JPMorgan Chase (JPM), and Citigroup (C). Some of the large banks could deliver reasonably healthy results. These businesses tend to hold up well in a rising interest-rate environment, assuming they are not hurt by a major slowdown in lending, consumer credit problems, or trading account losses. Elsewhere, it remains to be seen how the wider assortment of companies will fare. We have already received warnings on revenues or profits from a number of major companies operating across different industries. Needless to say, if the leaders are struggling, it is unlikely the smaller companies are doing much better.
From a technical perspective, the market has been quite volatile over the past few sessions. Last week, stocks managed to stage a brief rally, only to falter again. It remains to be seen if the bulls can regroup and push equities higher from here. It should be noted that equity valuations appear more attractive at current levels than they have been in some time, with the Value Line median price-to-earnings multiple now near the 15 mark. Further, sentiment is quite negative, which may indicate that much of the bad news – even future bad news like a possible recession -- is probably already factored into share prices. At some pont, patient investors with longer time horizons are likely to see some compelling opportunities. Still, no one is in a position to say when the market will stabilize, and that doesn’t seem likely until we see persistent news that inflation begins to get under control.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
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