The next two days of trading will bring a boatload of reports from the business beat, a number of which has the potential to impact the performance of the major equity averages. This morning, the headline report came from Commerce Department. It showed that retail sales for the month of January fell 0.8%, the biggest drop since March of last year, but not unexpected as it is normally a seasonally weak month as consumers take a break after the holiday shopping season.
In a separate report, we learned from the Labor Department that initial unemployment claims for the week ending February 10th totaled 212,000, which was down 8,000 from the prior week’s revised figure and still indicative of a tight labor market. In the industrial space, manufacturing activity in New York fell 2.4% last month (best reading since November) and in the greater Philadelphia area rose 5.2%. The equity futures, which were higher heading into the economic releases, are still presaging a positive start to the trading day stateside.
Later this morning, the economic news will continue to roll in with a report on industrial production and capacity utilization and the latest Home Builder Confidence Index. We also will get additional commentary on monetary policy from a few regional Federal Reserve Presidents. Tomorrow morning also will be very busy, with data due on producer (wholesale) prices, housing starts and building permits, and consumer sentiment. The Producer Price Index data will likely be closely monitored after the market sold off sharply on Tuesday’s report on January consumer prices. It is also worth noting that economic news from overseas today, particularly in the United Kingdom and Japan, was not encouraging.
Indeed, the major equity averages, which were on a tear heading into this week on better-than-expected fourth-quarter results from Corporate America, sold off sharply Tuesday on data showing increases in the January Consumer Price Index (CPI) and the core CPI, on both a sequential and 12-month basis. The hotter-than-expected inflation data drove Treasury market yields higher and spooked equity investors who were banking on the Federal Reserve cutting the federal-funds rate earlier than now likely. We have always maintained that cuts to the benchmark short-term interest rate will not come until around midyear.
The specter of lending rates remaining high for longer pressured the higher-growth stocks, particularly in the small-cap and technology sectors. The small-cap companies tend to be more-interest-rate sensitive; hence, the outsized losses we have seen over the last few trading sessions. This included a nearly 5% setback for the Russell 2000 Index on Tuesday. The equity averages rallied some yesterday, but did not come close to retracing the prior day’s setback.
The hotter inflation data threatens to short-circuit the recent bull run on fourth-quarter earnings results, which pushed the major equity averages to record highs. (The S&P 500 Index topped the 5,000 mark this week.) There was a notable move away from risky assets and into more value-oriented equity groups. The next few days of trading may reveal whether Tuesday’s selloff was an overreaction to the CPI report or possibly the start of a mild correction after a strong three-plus months of trading leading up to this week.
Investors also will be watching the latest financial results from semiconductor giant NVIDIA (NVDA) (due February 21st), which has been at the forefront of the artificial intelligence (AI)-driven surge for the technology sector.
Fourth-quarter earnings season has produced favorable results and that has provided support for many equities that are trading at elevated price-to-earnings multiples. Absent the positive quarterly results, we think the selloff on the hot inflation figures would have been more pronounced. Overall, with a little more than two-thirds of the S&P 500 companies having reported quarterly results, the vast majority of those companies have exceeded revenue and earnings expectations. However, those entities that failed to live up to consensus expectations have felt the angst of Wall Street. Given this high interest-rate backdrop, we continue to recommend investing in the stocks of high-quality companies that have a history of delivering steady earnings and cash flow growth. We think a measure of profit growth will need to be displayed in the coming quarters to justify the extended valuations of many of the S&P 500 companies.
Since the close of trading yesterday afternoon, there were a number of noteworthy earnings releases. The headline report came from Cisco Systems (CSCO), with the largest maker of networking equipment beating revenue and earnings estimates, but lowering its 2024 guidance. The technology company also plans to cut thousands of jobs after a slowdown in corporate tech spending wiped out its sales growth. Cisco Systems shares are trading lower in pre-market action. Likewise, equipment maker Deere & Company (DE) beat expectations in its latest quarter, but issued soft full-year 2024 guidance. Deere stock is looking at a weaker opening today. – 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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