As a new trading day is set to begin, there are signs of relief for the broader domestic stock market indexes after a day of marked stress. Investors are seemingly poised to buy the dip today. Volatility has persisted with the global progress of the coronavirus, the looming interest-rate cycle, and recent earnings and economic data all having influence. Most prominently impacting stocks, however, has been the prospect of a Russian invasion of Ukraine. The political and economic risks associated with a war, especially one in Europe, are considerable. Potential energy shortages would likely further drive up oil, gas, and electricity prices, exacerbating already high inflation.
Yesterday, investors sold holdings in technology growth issues and sought the relative safety of stocks in utilities and consumer staples companies. Financials also took it on the chin, while gold and bond prices gained. We would not be surprised to see more of the same today, unless the West can quickly come to favorable terms with Vladimir Putin.
What Russia will do is difficult to gauge but, in the meantime, investors can weigh economic data when managing their individual investment portfolios. In recent times, reports have indicated accelerating consumer and producer prices, healthy retail sales growth, positive corporate earnings trends, an uptick in jobless claims, increased labor participation, and slower housing starts. January existing home sales figures are due out this morning, and economists generally expect a slight decline from December levels; that market was hot in 2021, so a cooling off might well be in store for the months ahead. Meanwhile, the Federal Reserve, looking to rein in inflation, seems intent on raising short-term interest rates next month. Three or more one-quarter-point hikes are conceivable as 2022 unfolds. A reduction in the Fed’s balance sheet also appears in the cards. Given the likelihood of higher rates, the stock market is currently in re-pricing mode.
The most visible stock price action occurring yesterday included declines of 20% for lithium miner Albemarle (ALB), on concerns about the company’s cash burn; 4.5%, for chip maker Advanced Micro Devices (AMD); and 3.1% for Taiwan Semiconductor Manufacturing Co. (TSM); as well as gains of 4.0% for retail giant Walmart (WMT) and 3.4% for household products producer Clorox (CLX). In this tumultuous market environment, we advise investors to diversify their portfolios, with a healthy weighting towards high-quality, dividend-paying, value issues.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
