This morning, reports on the economy made for mixed reading. At 8:30 A.M. (EST), the Labor Department reported that initial jobless claims for the week ending February 12th came in at 248,000, which was up 23,000 from the prior week, but on the positive side, continuing claims fell last week. Meanwhile, the Commerce Department reported that housing starts for January came in at an annualized rate of 1.638 million units, which was down from December’s total, but a solid figure nonetheless. Building permits, which are an even more forward-looking indicator of building activity rose nicely, to an annualized rate of 1.899 units. The homebuilding and related housing data bear watching, given the industry’s importance to economic output (it is the second-largest contributor to GDP after the consumer sector) and the question of whether the recent increase in mortgage rates will eventually hurt the performance of the sector.
Weighing on the stock market this morning are renewed geopolitical concerns about tensions at Ukraine’s border. The equity futures weakened after US intelligence officials said that Russia’s claims that it is withdrawing troops along its border with Ukraine are false. The report unnerved investors, as it also said that Russia has actually increased its military presence along the Ukrainian border by more than 7,000 troops in the last few days and appears to be mobilizing for an imminent invasion.
The Federal Reserve also remains a focus of Wall Street ahead of next month’s Federal Open Market Committee (FOMC) meeting that will likely bring a change in central bank’s monetary policy course. Yesterday, the minutes from the January FOMC meeting (released at 2:00 P.M. yesterday) had a positive impact on trading during the final two hours of the session. The major averages significantly pared their intra-day losses and the S&P 500 Index managed to eke out a small three-point gain by the closing bell.
Although the Fed minutes showed that the central bank is indeed getting ready to raise short-term rates in an effort to combat inflation, they were seen as a bit more dovish as the interest-rate hikes are likely to be measured and probably in increments of 25 basis points. Recent commentary about the Fed’s next monetary move had raised speculation of a 50-basis-point hike at the March meeting, but our expectation after examining yesterday’s readout is that a quarter-point increase remains the most likely outcome. There also is the sense that the early year selloff on higher bond yields and worries about a more hawkish Fed repriced many equities, thus limiting the downside trading risk on that “Fed speak” yesterday.
Meantime, we also received some important earnings news from Corporate America, particularly on the technology front. After yesterday’s closing bell, technology giants Cisco Systems (CSCO) and NVIDIA (NVDA) both reported strong top- and bottom-line results and the latter company also issued a positive outlook for the remainder of 2022. Shares of the two tech companies are moving in opposite directions in extended hours trading, with CSCO stock garnering some support and NVIDIA shares lower on the company’s flat profit margins. Then this morning, retailing behemoth and Dow-30 component Walmart (WMT) reported better-than-expected fourth-quarter earnings, issued encouraging guidance regarding future results, and boosted its dividend; and its shares are up in pre-market action. Investors also should note that food delivery service DoorDash (DASH) shares are up sharply in pre-market action, while the stock of travel firm TripAdvisor (TRIP) is looking at a lower opening following a disappointing quarterly release.
So what is an investor to do heading into a period where the Federal Reserve will be tightening the monetary reins? Our sense is that a bit of caution may be warranted, with investors focused on a well-diversified portfolio of high-quality stocks and also keeping some cash on the sidelines. In an environment of rising bond yields (the coupon on the benchmark 10-year Treasury bond recently jumped above the 2.00% mark), the value-oriented cyclical names that tend to rise and fall with economic activity, including the financial and energy issues, may hold some extra appeal for investors. But as was seen with the reaction to the results of Cisco Systems last night, we would concentrate more on individual companies than broad-based sector investing. Our sense is that those companies with the strong balance sheets and the ability to generate ample cash flow are best positioned to weather the ill effects of inflation and a higher lending-rate environment. This theme is clearly playing a role in the interest in Walmart stock this morning following its aforementioned earnings release.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
