Stock futures are suggesting a negative open this trading day. At 10 o’clock this morning, the University of Michigan will release its latest survey on consumer sentiment and inflation expectations. Economists believe that consumers were slightly more optimistic about their financial situation in February but, even if that is true, sentiment would still be at a relatively low level. The one- and five-year inflation survey outlook might have declined some from the 3.9% and 2.9% marks, respectively, reported for January. This afternoon, investors will get a read on last month’s Federal budget deficit, anticipated to have meaningfully narrowed from the previous gauge of a $119 billion monthly shortfall, and hear from Fed Governor Christopher Waller and Philadelphia Fed President Patrick Harker. Recently, the markets have visibly reacted to general economic news and Fed officials’ statements, as well as December-quarter earnings announcements from corporations.
The major domestic stock market indexes may have trouble scoring gains for the current week. Stocks traded about flat until Tuesday afternoon, when Federal Reserve Chairman Jerome Powell provided an update on his view of the economy and on the central bank’s inflation-fighting policy. He reiterated that the Fed has more work to do in containing goods and services price growth, especially in light of a continued strong employment market, highlighted by rising wages. Mr. Powell appears intent on lifting short-term interest rates above 5% before summer and keeping them elevated, at least through year end, while reducing the central bank’s bond holdings, via maturities on the Fed balance sheet, which removes liquidity from the marketplace. Investors, however, picked up on the chairman’s mention of disinflation (i.e., slower price growth), supporting higher share prices toward the day’s close.
At mid-week, additional comments from other Fed officials (John Williams, Lisa Cook, Michael Barr, Raphael Bostic, Neel Kashkari, and Chris Waller), on the whole, guided that rates should be higher, and elevated for an extended period of time, in order to meaningfully rein in inflation. These comments weighed on the stock markets for most of Wednesday. Then, yesterday morning, just before the start of trading, stock futures received some relief in the form of somewhat higher initial jobless claims, which rose 196,000 in the week ended February 4th, versus a quite modest 183,000 in the prior week. Too, continuing jobless claims (a measure of sustained unemployment for one week) ticked up from 1.65 million to 1.69 million in the week ended January 28th. As the day wore on, however, optimism about a possible softening of the employment market, leading to rate cuts later this year, faded. Not very encouraging earnings reports from Credit Suisse (CS) and toy maker Mattel (MAT), restructuring actions announced by entertainment company Walt Disney (DIS) and investment bank JPMorgan Chase (JPM), and concerns that Alphabet (GOOG) will have trouble competing against software developer Microsoft (MSFT) in the Internet search market didn’t help valuations either.
Stocks remain in positive territory, thus far, this year. In recent days, though, we note that leadership has again shifted back in favor of conservative blue-chip Dow Jones Industrial Average equities, versus the tech-heavy, growth-oriented NASDAQ Composite. Economic measures are mixed, with inflation elevated, unemployment low, wages high, tech companies laying off people, restaurants and hotels hiring, consumer goods demand softening, services spending staying healthy, consumer savings trending down, credit card balances increasing, and borrowing costs up. We maintain that considerable uncertainty persists. About equal weighting of high-quality defensive and growth issues within individual portfolios appears a most prudent investment strategy at this time. – David M. Reimer
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
CLICK HERE for more information on our services or call 1-800-VALUELINE (1-800-825-8354). Our account managers are available Monday through Friday, 8:00 AM to 6:00 PM Eastern Time.
