The middle day of the trading week begins with Wall Street digesting the results from yesterday’s mid-term elections. The results so far reported have produced some more uncertainty for investors, as control of the House of Representatives and Senate still appears to hang in the balance this morning and may do so for the next several weeks. Projections still are calling for a divided government, with a possible narrow win by Republicans in the House, but that is still too close to call. Wall Street typically does not like uncertainty and hence the futures are indicating a modestly lower start to the trading day stateside after a strong rally the last three trading sessions. Historically, Wall Street, though, does seem to like a divided government and the gridlock it brings on a number of legislative issues.
Meanwhile, it has been a light week thus far for headline economic news, but that will change tomorrow morning with the release of the Consumer Price Index (CPI) report for October. Market pundits will be closely examining that data for signs about inflation and whether prices are starting to moderate. The consensus is split on that front, with most economists expecting an increase in consumer prices on a month-to-month basis, but some moderation in the trend of year-over-year results. Ahead of tomorrow’s pricing data, Federal Reserve Chairman Jerome Powell said last week that inflation remains elevated and indicated that the central bank may have to raise the federal funds rate to around 5.0% by mid-2023 and keep it at a more restrictive level for a longer duration than initially anticipated as it fights inflation.
On the corporate earnings front, the headline report came from The Walt Disney Company (DIS) after yesterday’s closing bell. The theme parks and entertainment giant posted adjusted fiscal fourth-quarter earnings of $0.30 a share, down 19% from the year-earlier period and well below the consensus forecast. The company’s expectation that sales growth will slow in the coming quarters, and the reduced forecasts for Disney+ video streaming subscribers also did not sit well with investors. The streaming giant is dealing with slowing subscription growth and soaring production costs for new content. Shares of Disney are trading lower in pre-market action.
Likewise, the stock of D.R. Horton (DHI) is looking at a lower opening after the nation’s largest homebuilder reported that fiscal fourth-quarter (ended September 30th) revenues and earnings fell short of consensus forecasts, with the continued rise in borrowing costs hurting demand for new homes.
From a sector perspective, there has been a clear movement of late into the energy, industrial, and financial groups. The recent rally by the Dow Jones Industrial Average and the S&P 500 Index has been mostly driven by the stocks of the value-oriented companies and the so-called “old economy” names, like heavy equipment maker Caterpillar (CAT) and industrial company DuPont de Nemours (DD), the latter of which surpassed both revenue and earnings-per-share expectations in the latest quarter.
Conversely, it remains a tough stretch for the technology sector, with disappointing quarterly results from a number of mega-cap technology companies in recent weeks and the increase in interest rates this year pressuring the higher-growth sector. That said, investors should note that shares of Meta Platforms (META), which have been pummeled this year, are pointing to a higher opening this morning after the company announced a round of layoffs yesterday, citing a slowing economy as the primary reason.
So what is an investor to do? We continue to recommend taking a cautious approach, maintaining a portfolio of high-quality stocks and cash. There is still a lot of uncertainty ahead for investors, including whether the Federal Reserve will successfully tame inflation and just how negative an impact the central bank’s increasingly restrictive monetary policies will have on the performance of the U.S. economy. Then there is the looming energy crisis in Europe this winter and the ongoing military conflict in Eastern Europe. A new possible headwind for investors is a looming debt ceiling battle on Capitol Hill and potential government shutdown down the road if the Republican Party takes control of the House of Representatives and the two parties can’t come to an agreement on a government spending budget. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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