U.S. stock market indexes appear set to erase all or most of their losses posted thus far this week, with futures pointing to a positive open.
The University of Michigan will release preliminary consumer sentiment figures this morning. Economists expect a slight decline in the university’s headline measure. Geopolitical events surrounding the Russia-Ukraine conflict, however, will probably be the prime driver of share-price performance. Over the course of the current week, stocks endured substantial volatility. Investors closely monitored global leaders’ interviews with the media, and reported negotiations amongst each other, regarding the war. Wall Street is looking for indications of its likely duration. We believe that the arrival of peace would probably lead to a quick surge in equity prices. Conversely, an event pointing to a lengthening and/or expansion of the conflict would surely result in additional, possibly sharp, share-price declines. Even if there’s a quick end to the conflict, Western sanctions against Russia might remain in place for some time. Heightened price volatility may well persist in the coming days and weeks.
Concerns about inflation are also affecting stock valuations. Recent data show that prices for goods and services continue to increase at a high rate. Rising costs for energy commodities and raw materials, as well as wage hikes, threaten the pace of corporate earnings growth in the quarters ahead. Though currently strong, consumer spending could soften, should inflation prove resilient to the Federal Reserve’s containment efforts. The Fed will meet next week to decide on the size of an initial short-term rate increase. It seems likely that the central bank will start with a one-quarter-point action. The consensus among economists appears to be that the Fed will be considerably behind the curve at the beginning of the new interest rate cycle. Several hikes may be in store through the end of this year and into 2023. A reduction in the Fed balance sheet appears to be in the cards, as well. Given the geopolitical and monetary uncertainty, additional wide stock-price swings could linger in the near term. High-quality stocks offer investors a good degree of asset preservation and some opportunity to gain from a return to a more settled investing environment.
In Thursday’s trading, advancing sectors included energy, consumer discretionary, transportation, utilities, and real estate, while technology, consumer staples, financials, and communications services all lost ground. Notably, oilfield services companies Halliburton (HAL) and Baker Hughes (BKR) each gained about 9% in share price. Other respectable performances came from online retailer Amazon.com (AMZN), energy exploration outfit EOG Resources (EOG), and hydrogen and nitrogen supplier CF Industries (CF), all posting price increases in the 5% range. In recent times, leadership among the sectors has shifted according to the daily news feed. This situation may not change for quite a while. Thus, we advise investors to diversify their portfolios but, at the same time, maintain a weighting in favor of conservative companies with good earnings and cash flow track records and a growing dividend.
– David M. Reimer
At the time of this article’ writing, the author did not have positions in any of the companies mentioned.
