This morning, the attention of Wall Street, which has been focused mostly on the turmoil in Eastern Europe and its impact on global crude oil supplies, turned to the U.S. economy. That was because at 8:30 A.M. (EST), the Department of Labor released the latest report on the Consumer Price Index, and as expected the data showed a continued spike in inflation. Specifically, consumer prices rose 0.8% last month, which was higher than the consensus expectation of 0.6%. Likewise, the 12-month increase came in at a very hot 7.9%, which again exceeded the previous month’s figure. Meantime, initial weekly jobless claims for the week ending March 5th, came in at 227,000, up 11,000 from the previous week’s figure.
The consumer pricing data, along with the Labor Department’s companion report on producer (wholesale) prices (due next Tuesday), will be scrutinized by the Federal Reserve ahead of next Tuesday’s two-day monetary policy meeting, which is expected to bring the first short-term interest-rate hike since late 2018. The equity futures, which were down notably heading into the CPI release on news that a meeting between the Ukrainian and Russian foreign ministers in Turkey failed to produce a cease fire in the fighting in Eastern Europe, are still indicating a sharply lower opening for the U.S. equity market.
The name of the game on Wall Street these days is volatility. Indeed, the aforementioned Federal Reserve monetary policy decision and ongoing war in Ukraine have unnerved investors. On the latter front, market pundits are worried that the increased energy costs resulting from the disruptions to supplies due to the war will, in time, hurt the performance of the U.S. economy. People faced with higher bills to fill their cars’ gas tanks and heat their homes have historically deferred purchases of other discretionary items, and such often has a negative ripple effect on the broader economy and can lead to a slowing of economic growth. These concerns eased a bit yesterday after reports from Europe said the there are enough oil and gas inventories to get the European Union nations through the winter, even without fuel supplies from Russia. This resulted in a 12% drop in the price of oil yesterday, marking the worst day for the energy commodity since November. However, signs of little progress in talks between Russian and Ukrainian officials this morning have brought renewed concerns, and oil and gas prices are retracing some of yesterday’s declines.
The major U.S. equity averages rallied notably yesterday after an extended stretch of daily setbacks that pushed the NASDAQ Composite into bear market territory (that is, a 20% decline from the recent high point of that stock index in November of 2021). The war in Ukraine and the expectation that the Fed will begin raising interest rates next week has been a double-edged sword for investors, especially those with positions in the technology sector. In particular, the mega-cap technology names, which held up better than most of the other technology stocks earlier this year when rising bond yields unnerved investors, have been under heavy selling pressure of late. An exception was yesterday’s rally for the technology sector. Investors also should note that shares of Amazon.com (AMZN) are higher in pre-market action after the technology and retail behemoth announced a 20-for-1 stock split that raised speculation that the move was a precursor to that stock’s inclusion in the Dow Jones Industrial Average.
In general, the ongoing “flight-to-safety” strategy on Wall Street has pulled many investors away from the riskier higher-growth technology sector and toward the more-defensive oriented issues (e.g., utilities). The stocks of energy companies also have drawn great interest, fueled by the recent increases in oil and gas prices, the likes of which had not been seen in the 14 years since this the nation was in the early stages of the 2008-2009 financial crisis.
Meantime, we would like to touch on the recent performance of the small-cap market. This sector has been spared some of the recent wrath of Wall Street toward high-growth stocks. We think this may be due to the smaller-sized companies having less exposure to the international markets. However, with the Federal Reserve set to raise short-term rates next week, which, in time, will make it more expensive for companies of all sizes to operate, now may be the time to scale back a bit on the exposure to the small-cap equity market. The aforementioned higher fuel costs also will add to smaller-business operating expenses in the coming months.
So what is an investor to do during this period of heightened stock market volatility? The first thing is not to panic sell. Such a move would have resulted in many investors missing out on yesterday’s broad-based rally. Instead, as we have recommend here for several weeks, investors should exercise extra caution and use days like yesterday to continue shifting some of their funds into the higher quality names, many of which are ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line. Increased holdings of fixed-income securities and cash also may decrease some of the potential near-term downside risk.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
