Continuing the market volatility, index futures are down more than 1% as we write this report. Two economic releases of interest came from the Department of Labor. The final revision to the fourth-quarter nonfarm U.S. productivity figure was revised higher, from 1.2% to 1.5%, which, along with a 2.2% increase in unit labor costs, were better than forecasts and some good news for the Federal Reserve. Increased productivity and lower unit labor costs are can often lead to a decline in the overall inflation rate. In a separate report, we learned that initial unemployment claims for the week March 1st totaled 221,000, which was down 21,000 from the previous week’s tally and below consensus forecasts, running at a level suggesting the labor market remains tight. Meanwhile, the Commerce Department reported that the U.S. trade deficit expanded to a record $134 billion in January. The equity futures, which were notably weak heading into the economic releases, are still presaging a sharply lower opening for the U.S. stock market when trading kicks off stateside.
The economic news is ratcheted up tomorrow morning, with the release of the February employment and unemployment figures at 8:30 A.M. (EST). Wall Street and the Fed will be watching that release for clues about whether the jobs market is cooling off. Yesterday, payroll processing giant Automatic Data Processing (ADP) reported that just 77,000 private-sector jobs were created last month, falling well short of the consensus forecast of 148,000 and the January total of 186,000. Some emerging concerns about the U.S. economy and patches of softness in the labor market have raised the odds of multiple Federal Reserve interest-rate cuts in the back half of this year. This morning, the European Central Bank (ECB) cut its benchmark short-term interest rate by a quarter point, to 2.50%, as economic growth worries in the euro zone persist.
On the corporate front, we did get quarterly news from a few technology companies, and the majority of it was well received, with the stocks of the semiconductor companies in particular weighing on the performance of the equity futures. Marvell Technology (MRVL) reported only slight beats on both the top and bottom lines and issued in-line guidance. Shares of the semiconductor company are down sharply in extended-hours trading. Likewise, the stock of MongoDB (MDB) is lower in pre-market action after the technology company beat expectations, but the revenue growth rate was a bit slower than the prior-year period and margins were on the light side. Conversely, shares of Zscaler (ZS) are bucking the likely downward trend today in the technology space, moving high in pre-market action after the cloud-based cyber-security company easily beat prognostications on both the revenue and earnings lines and reaffirmed its current-quarter guidance. In the consumer space, we did get quarterly results from BJ’s Wholesale Club (BJ), Victoria’s Secret & Co. (VSCO) and Macy’s (M). With regard to the three stocks, BJ’s is the only one looking at a higher opening.
The major equity averages have been on a rollercoaster ride over the last fortnight, with a bearish undertone for much of the two-week stretch. The primary reason for the choppiness are concerns that the Trump Administration’s tariffs on good coming from Mexico and Canada, which took effect on Monday, will have a detrimental impact on inflation and the overall health of the U.S. economy. The major indexes reversed course yesterday after reports surfaced that tariffs on automobiles coming in from Canada and Mexico would be delayed for another month. That news, along with data from the Institute for Supply Management showing an uptick in nonmanufacturing (services) activity last month, quelled Wall Street’s fears, but that appears to be short-lived.
The tariff situation remains quite fluid and changes to the implementation process could potentially cause the direction of trading to change on a dime. The financial stocks, including some of the banks, were under pressure during yesterday’s bullish session on tariff concerns. Conversely, the stocks of the automobile makers rallied notably on the tariff news. The Federal Reserve’s latest Beige Book summation of economic conditions (released at 2:00 P.M. (EST) yesterday) showed growing concerns from the central bank about the effect of tariffs on the health of the U.S. economy.
In general, the name of the game on Wall Street these days is volatility. This is not surprising as Wall Street does not like uncertainty and it is getting that in the form of the President’s tariff agenda. Uncertainty about near-term fiscal and monetary policies and worries about a reacceleration in the pace of both consumer and producer (wholesale) price growth also has unnerved investors. This environment has prompted a rotation out of some of the riskier assets and into more defensive holdings, including the healthcare issues. The Dow Jones Industrial Average, the NASDAQ Composite, and the broader S&P 500 Index rallied 486, 268, and 64 points, respectively, yesterday, but nearly all of those gains and then some in the case of the NASDAQ are likely to be wiped out at the start of trading this morning.
In this volatile environment, a diversified portfolio of high-quality stocks from a variety of sectors and a sizable position of cash-equivalent securities may provide some downside protection, but would also keep investors from fully participating in potential notable rallies on Wall Street. –William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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