This morning, Wall Street’s attention turned to the U.S. economy, with a number of important reports released at 8:30 A.M. (EDT). The Labor Department reported that initial weekly jobless claims for the week ending March 26th came in at 202,000. That figure was up from the previous-week’s 52-year-low tally of 186,000, but, along with yesterday’s report from Automatic Data Processing (ADP) showing an increase in private-sector jobs of 455,000 this month (slightly above the consensus forecast), highlighted the continued strength of the labor market ahead of tomorrow’s report on March nonfarm payrolls from the government.
We also received the February figures on personal income and expenditures from the Commerce Department, but that did not make for as pleasant reading. It showed a modest increase in personal income (+0.5%), but also a big drop in the pace of spending (from +2.1% in January to +0.2%). The Personal Consumption Expenditures (PCE) Index, which reflects the changes in the prices of goods and services purchased by consumers in the United States and is considered a key gauge of inflation by the central bank, again showed notable 12-month increases.
The PCE Index and the “core” PCE Index, which excludes the more-volatile energy and food components, increased 6.4% and 5.4%, respectively, on a 12-month basis. The strong employment data and elevated PCE readings, the highest since the early 1980s, likely add to the view that the Federal Reserve will act more aggressively in its monetary policy tightening to combat inflation in the coming months and stabilize prices. The equity futures, which were mixed and not too far removed from the neutral line heading into the economic data, are indicating a similar start to the trading day stateside.
Looking to the trading day ahead, investors should be aware that it is the final session of the first quarter, which has been a volatile 90-day stretch for the U.S. equity market. It marks the worst quarterly performance in two years, even with March being the best month for the major equity indexes since last October. The final day of the quarter typically brings “window dressing,” which is an attempt by mutual fund and other portfolio managers to improve the appearance of a fund's performance and holdings before presenting it to clients or shareholders. To window dress, the fund manager typically sells stocks with large losses and purchases high-flying stocks near the end of the quarter.
Meantime, investors are keeping close tabs on Treasury market yields. The recent modest pullback in the 10-year Treasury bond yield (at just above 2.30% this morning) after the benchmark briefly topped the 2.50% mark last week, is giving some support to the technology names. The narrowing of the spread between the two- and 10-year Treasury note yields has brought worries about an inverted yield curve, wherein short-term rates are higher for a time than long-term rates. Such “inversions” have historically preceded a period of slowing economic growth and many times a recession. This has given a near-term boost to some of the higher-growth technology stocks, which investors believe would likely perform better than the cyclical names in a recessionary environment. That said …
Rising borrowing costs are typically not good news for the higher-growth stocks that are valued more on the company’s future earning potential. Indeed, when rates rise, those potential future gains are discounted back to current dollars at a higher rate, lowering the stock’s intrinsic value (i.e., the measure of what an asset is worth) and making it less likely that investors are going to pay a higher premium for a commitment. Thus, even with the technology stocks rallying after they were oversold earlier this year, we would still recommend that investors considering a stake in the industry look at the more-established and profitable big-tech names, as those companies offer growth potential, but also have the financial wherewithal to weather any downturn better than some of the less profitable tech companies. On point, shares of Apple (AAPL) have traded higher in 11 of the last 12 sessions.
Speaking of technology, it was a difficult session yesterday for many of the high-technology stocks in the financial industry, known as fin-tech stocks, including those of PayPal (PYPL) and Block (SQ). The selloff was prompted by news that technology behemoth Apple was considering bringing more financial services functions in house, which would reduce the need for services from some of the smaller fin-tech companies.
And on the inflation front, some of the value names in the energy, materials, and financial sectors offer a bit of protection.
Given all the current variables in play for the market these days, including the uncertainty of how hawkish the central bank will be in the coming months, continued inflationary pressures, some growing concerns that higher borrowing costs will eventually begin to weigh on corporate earnings, and the ongoing geopolitical turmoil in Eastern Europe, we believe that the best near-term strategy may be individual stock picking, based on company fundamentals, rather than broad-based sector investing. We would continue to give the stocks of the high-quality companies with strong cash flows that pay dividends and have the ability to buy back their shares, a closer look. The stocks ranked 1 (Highest) and 2 (Above Average) for Safety by Value Line may be a good place to start.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
