The attention of Wall Street during today’s session will again be focused on the war in Ukraine and testimony before Congress from Federal Reserve Chairman Jerome Powell. Yesterday’s commentary from the central bank leader (more details below) produced a big rally in the U.S. equity market. But before we get to the resumption of Chairman Powell’s testimony later this morning, investors will digest a few reports on the economy. The equity futures, which were modestly lower earlier this morning, are now presaging a continuation of yesterday’s rally when trading commences stateside.
At 8:30 A.M. (EST), the Labor Department reported that initial weekly jobless claims for the week ending February 26th came in at 215,000, which was an improvement from the previous week’s revised tally of 233,000. This comes on the heels of yesterday’s encouraging report on private sector payrolls from Automatic Data Processing (ADP) and ahead of tomorrow’s much-anticipated report on February payrolls from the Labor Department. We also got the final estimate for fourth-quarter productivity, which stayed at a very strong 6.6% increase. A half-hour into today’s trading session (at 10:00 A.M. EST), we will get the latest data on nonmanufacturing activity from the Institute for Supply Management (ISM). The economic data of late, including today’s releases, have been encouraging, and will likely pave the way for the central bank to begin raising short-term interest rates.
This week has been a roller coaster ride thus far for equity and bond investors. Earlier in the week, the stock market sold off sharply, as investors worried about the escalation of war in Ukraine and the notable spike in oil prices, as the United States, the North Atlantic Treaty Organization (NATO), and a host of other countries placed retaliatory economic sanctions on Russia designed to punish that country’s financial and energy industries. The geopolitical turmoil put investors around the world in a “flight-to-safety” mode, and increased demand for defensive-oriented stocks (e.g., utilities) and fixed-income securities. The desire for safety pushed bond yields lower despite continued data showing a spike in inflation, which other things equal would tend to push yields up. The price of gold, which also is viewed as a safe-haven asset and a bet against inflation, has been on a steady upward trajectory. That said…
The major equity averages staged a sharp rally yesterday, with the Dow Jones Industrial Average, the NASDAQ Composite, and the broader S&P 500 Index recovering 1.8%, 1.6%, and 1.9%, respectively. The main catalyst was what most market pundits deemed to be slightly less hawkish remarks on monetary policy from Fed Chairman Jerome Powell. While Mr. Powell did say that “record job growth and the hot nature of inflation should push the central bank to begin a series of interest-rate hikes later this month in an attempt to rein in inflation and stabilize pricing,” the Fed is now expected to proceed somewhat cautiously with the war in Ukraine now posing a threat to the health of the global economy. Importantly, the Fed leader said he will “propose and support” a 25-basis-point interest-rate hike at this month’s monetary policy meeting, which seems to be already priced into equity market valuations. In recent weeks, there was some sentiment that a half-percentage-point increase was possible, given the hot pricing data. The situation overseas may have taken that off the table for the time being.
Yesterday’s market rally was broad-based and included some notable recoveries for the financial and industrial stocks, which had suffered in prior trading sessions. The drop in the bond yields on the geopolitical turmoil, which yields have since recovered a bit, hurt the banking stocks. It was also another good day for the oil and gas stocks, which rose as crude oil prices both here and abroad jumped sharply, with benchmark Brent crude quotations topping the $115-a-barrel mark, the highest level in over a decade. The elevated oil prices—which may yet take another big step up as the war in Ukraine reduces the global supply—bear watching, as a prolonged period of more expensive energy has historically slowed the pace of economic growth. Higher energy prices may force both consumers to reduce their spending on other products and services down the road and businesses to reconsider their investment activity, impacting GDP growth. These factors are in the picture for Federal Reserve policymakers as they begin to craft a less accommodative monetary policy course.
With so much uncertainty in the market right now, exacerbated by the turmoil in Eastern Europe and the unknowns with regard to the central bank’s forthcoming monetary policy actions, this may be a good time for investors to exercise an increased level of caution. Nimble investors may want to use some of the rallies like the one we saw yesterday as an opportunity to reshape their portfolios with further fixed-income exposure and the addition of some higher-quality equities. Those equities with more modest price-to-earnings valuations may be less vulnerable than some of the higher-growth stocks if the increased volatility in the stock market continues. That is a good possibility given some of the aforementioned factors at play.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
