Before The Bell
Stock futures are pointing higher this morning, supported by news that healthcare giant Johnson & Johnson (JNJ) will split into two companies. But, barring a big rally, the market appears headed for a modest decline on the week.
Thursday’s price action among the major stock market indexes was mixed, with the Dow Jones Industrial Average falling 159 points, but the NASDAQ gaining 82 points and the S&P 500 inching ahead a couple of points. Shares of small-cap companies shined, with the Russell 2000 gaining 20 points.
Weakness in shares of Walt Disney Co. (DIS) weighed on the Dow following a slowdown in subscriber additions to Disney’s streaming service.
The tech-heavy NASDAQ bounced back from the broad mid-week selloff induced by a startling report on higher inflation. A period of rising prices has clearly arrived, although so far it has not had a major effect on financial markets. In days gone by the Federal Reserve was much more concerned about inflation, and was more likely to raise interest rates to combat what was seen as a destabilizing threat to the economy.
But after years of low inflation, the Fed is willing to wait and see if the trend calms down. Most likely it will to some degree, but how quickly and by how much remains to be seen. For now, it appears as if the central bank may start raising the short-term interest rates it controls in the second half of 2022.
To date, that has been far enough away to not shake the confidence of the bulls, particularly since tame bond yields have not created much competition for stocks.
Normally, the bond market reacts more quickly to economic data than the Federal Reserve. But that is only occurring to a limited extent this time around, at least in part because of a large number of buyers for yields of any substance. Yields in a number of markets in Europe and Asia are lower than stateside, or even negative.
Inflation could still dampen returns for stocks if bond yields start climbing steadily. Real wages (adjusted for inflation) have also slipped lately, making it tougher for consumers to buy more of anything.
Overall, the bull market is clearly intact as the economic recovery continues. But investors may become more selective towards stocks if the rising price environment persists, and favor those of companies with the capability of consistently passing along rising costs.
– Robert Mitkowski
At the time of this writing, the author did not have positions in any of the companies mentioned in this article.
