The stock market began this week on a strong note, as talks between Russia and Ukraine boosted optimism that a cease fire would take hold. As the week unfolded, however, it was apparent that the two sides in the East European conflict were having difficulty reaching any firm agreement. Also weighing on the market has been brief inversions of the yield curve; that is, rates on short-term government bonds exceeding those of longer-dated Treasuries. Historically, in most instances, inversions have preceded recessions. Furthermore, widening inflation is increasing investors’ concerns about consumer spending and corporate earnings, adding to share-price pressure. The Federal Reserve is closely monitoring economic data, indicating that it will remain flexible in the interest rate cycle now under way. Currently, the central bank seems likely to take an aggressive stance in raising short-term interest rates to combat fast-rising prices.
Notwithstanding the negatives, stock futures are pointing to a higher opening today. Early this morning, the Bureau of Labor Statistics released March employment data. Domestic payrolls expanded by a decent 431,000, which was a bit below estimates, and the unemployment rate declined to a low 3.6%. The labor participation rate, at 62.4%, is holding up well. As the coronavirus fades into the background, more people are returning to work, and the gap between available workers and open positions is slowly narrowing. Wage stress on companies, though, looks to stay persistent. Other data scheduled to be announced today include the Census Bureau’s February construction spending figures and the Institute for Supply Management’s Purchasing Managers’ Index for March. Share prices will likely move according to how far the real data is from economists’ expectations. On balance, the broader market averages seem on track to be flat to slightly higher for the full week.
In Thursday’s trading, utilities, as a whole, were flat and all other sectors posted losses. Most visibly, Advanced Micro Devices (AMD) fell 8.3%, HP Inc. (HPQ) was off 6.5%, and Walgreens Boots Alliance (WBA) gave back 5.7%. Still, there were some notable gainers. Benefiting from optimism about relaxed COVID-19 prevention measures, cruise line stocks advanced. Norwegian (NCLH), Carnival (CCL), and Royal Caribbean (RCL) were up 3.3%, 3.1%, and 2.8%, respectively. For the day, investors seemed to have reconsidered technology stocks’ exposure to rising interest rates and shifted some money toward reopening issues.
Share-price volatility has been subdued, but we would not be surprised to see momentary increases over the near term. So far this year, the stock market has performed reasonably well, despite much uncertainty. A lot has to go right for the market to post gains for 2022. Most prominently, the Fed has to contain inflation without pushing the economy into a recession, the Russia-Ukraine conflict needs to soon be peacefully resolved, and supply chains have to further strengthen. Fortunately, consumers and corporations have built cash cushions and improved their financial positions. The economy seems capable of withstanding inflation and central bank tightening, at least in the near term. All considered, investors should play the long game. Over time, more often than not, the markets march higher. In the current environment, it’s best to continue focusing on investment in companies with good sales and earnings records, as well as rising cash flow, which typically goes toward rewarding stockholders with share buybacks and dividend growth.
– David M. Reimer
At the time of this article’ writing, the author did not have positions in any of the companies mentioned.
