Following four straight days of gains, the Dow Jones Industrial Average, Standard & Poor’s 500 Index, and the NASDAQ exchange all posted declines on Thursday. Now, signs point to a mixed opening for today’s stock market. While the current earnings season has generally been marked by companies displaying solid growth for the recently concluded December quarter, businesses falling short of Wall Street’s expectations have notably endured sharp stock price declines. Meanwhile, those beating the Street consensus have mostly posted modest price advances.
Tech issues in particular have been in the spotlight. After the market closed yesterday, online retail merchandiser Amazon.com (AMZN) announced strong revenues and earnings, with a good deal of support coming from its Amazon Web Services cloud-computing segment. Alphabet (GOOG), the parent of Internet search engine Google, also announced very favorable operating results for the quarter, on the strength of advertising and cloud services. The respective earnings beats buttressed the share prices of Amazon and Alphabet. Conversely, shares of digital payments facilitator PayPal (PYPL) and social media outfit Meta Platforms (FB), owner of Facebook, recently came under pressure due to poor financial performances. Most notably, “index stock” Meta has been a heavy drag on the NASDAQ. There is considerable risk in the company’s build-out of a costly new “metaverse” virtual-reality platform, and consistent earnings seem many years away. Over all, stock market volatility looks to persist in the days ahead, as more earnings are released.
This morning, investors are parsing January U.S. job growth figures, which showed marked strength. Jobs numbers for November and December were revised higher. Even so, it appears that the Omicron variant of the coronavirus has had a limited negative impact, with many workers calling in sick or avoiding the workplace for fear of infection, company staffing has remained challenging. Businesses are striving to hold on to existing employees, while looking to build their ranks. Wage inflation continues to be significant.
Expectations are that the Federal Reserve will begin raising short-term interest rates in March. Fed officials have indicated to expect three or more hikes this year, each of at least one quarter percentage point; additional increases may be on tap for 2023. They are also considering a possible reduction of the central bank’s bond balance sheet, thereby further reducing liquidity in the financial markets. The Fed’s job might be made easier if inflation starts to subside on its own, which it might should supply-chain problems meaningfully fade. With Omicron cases on the down slope, consumers now seem to be shifting spending from durable goods towards services. Such a trend would imply less inflation in the coming months. In light of the current economic environment, we don’t think it’s yet time to fully recommit to risky, high-growth equities (e.g., tech stocks); an incremental approach to any buying is most prudent. On balance, conservative, dividend-paying large cap stocks appear to be the best investments at present.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
