The major market indexes were up modestly through the first four trading days of this week, with the NASDAQ performing better than the Standard & Poor’s 500 and the Dow Jones Industrial Average. Early this morning, stock futures suggested a weak open.
At noon today, investors will get a read on the Federal Reserve’s latest Index of Common Inflation Expectations for the coming 5-10 years and the 10-year mark, versus the previous respective measures of 3.1% and 2.2%. We would not be surprised to see both of those expectations take a step up, which, if that is the case, could add some pressure to share prices.
Volatility has perked up in recent weeks, but is not at an extreme level. The September-quarter corporate earnings season is well under way. So far, a clear majority of companies are beating Wall Street expectations, though those expectations were reduced beforehand. Managements’ operating outlook for the remainder of this year is generally favorable, notwithstanding inflationary pressures, rising interest rates, a strong U.S. dollar, a tight labor market, materials shortages, and lingering global supply-chain challenges. We note that market heavy weights Alphabet (GOOG), Apple (AAPL), and Amazon.com (AMZN) are scheduled to release updated financial figures next week.
Over all, the stock market remains stressed, given persistent concerns about the coronavirus pandemic, most visibly, continued lockdowns in the world’s second largest economy, China; the ongoing conflict between Russia and Ukraine, which has disrupted flows of food and energy commodities, worldwide; the fiscal policy of developed economies, tilted toward spending; and the monetary policy of key central banks, that is, raising short-term interest rates and reducing bond purchases.
Here in the United States, Federal Reserve officials remain committed to raising interest rates, as evidenced by their recent comments. There are signs that the Fed’s current rate cycle is having an impact. Housing sales have fallen, the cost of used cars is sliding, energy prices have come down from recent peaks, retail inventories are bloated, sales of semiconductors (and electronics) have weakened, the transportation of goods and commodities is slackening, manufacturing is throttling back, corporations are becoming more circumspect about spending on new projects, and consumers are reprioritizing their household budgets. Despite all of these signs, the Fed still sees a healthy labor market, sustained consumer spending, and flush individual bank accounts. Importantly, the Fed will parse new inflation and employment data, due out late next week.
Indications are that the U.S. central bank might well raise short-term interest rates by 0.75 of a percentage point at both its November and December meetings, the fourth and fifth such moves of magnitude. That would put the Fed Funds borrowing range at 4.50%-4.75%. Some economists expect the Fed to implement another one-quarter percentage-point increase in early 2023, before taking a pause to see what its handiwork is doing. More than a few of these experts warn that high borrowing costs are stressing the financial markets. Emerging market nations, with sizable U.S. debt balances on their books, are beginning to struggle to keep up with scheduled payments. Too, there is mounting danger of a “Black Swan” event, similar to the collateralized debt crisis that sparked a serious economic downturn in the 2007-2009 period. We do not forecast such a draconian event, but a mild-to-moderate recession cannot be ruled out in 2023.
Sustained stock market volatility appears in store for the rest of 2022. It’s also important to note that elevated yields are making bonds more of a competitive investment alternative. All said, investors should favor stocks in well-heeled industry leaders. The healthcare and energy sectors have performed comparatively well this year. – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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