This morning, we received a number of important reports on the economy that will be closely monitored by the Federal Reserve for more clues to how the U.S. economy and, perhaps most importantly, the U.S. consumer are faring. At 8:30 A.M. EDT, the Commerce Department reported that retail sales in March advanced 0.5%, which was a tad lower than the consensus expectation of 0.6% and down from the revised February figure of 0.8%. Meanwhile, the reading on weekly jobless claims for the week ending April 9th, at 185,000, was still well below 200,000 and another encouraging sign for the U.S. labor market. The theme to be taken away from the retail sales data is that rising prices for food and energy are starting to lead to a cutback in spending on other discretionary items.
The equity futures, which were mixed heading into the economic releases, are indicating a similar start to the trading day stateside, with none of the major equity averages too far removed from the neutral line.
First-quarter earnings season is off and running with a slew of results pouring in from the big banks. JPMorgan Chase (JPM) kicked off the festivities yesterday, and the news was not great. The banking giant reported a 42% drop in quarterly earnings, and CEO Jamie Dimon offered a cautious near-term outlook. JPMorgan’s performance is viewed as a bellwether for the U.S. economy and its lackluster results are an indication that inflationary pressures are starting to take a toll on the performance of the economy. This morning, the news was better, as both Morgan Stanley (MS) and Goldman Sachs (GS) beat expectations, though their results were down year to year. The stocks of both companies are higher in pre-market action.
Meantime, the news that has Wall Street buzzing this morning is the report that Tesla (TSLA) founder and CEO Elon Musk has offered to buy 100% of Twitter (TWTR) for $54.20 a share. Earlier this month, it was disclosed in an SEC filing that Mr. Musk had amassed a 9.2% in the social media platform. It now appears the Tesla head has bigger plans for Twitter, but this situation remains highly fluid, as Mr. Musk does not have the financing in place yet to fund the transaction. Shares of Twitter are now up more than 50% from their 52-week low.
Overall, this abbreviated trading week (the market is closed tomorrow in observance of Good Friday) has been another choppy one for equities. Investors initially reacted negatively to data showing big year-over-year advances in both producer and consumer prices. The pricing data also increased the likelihood that the Federal Reserve will raise the benchmark short-term interest rate by 50 basis points at next month’s Federal Open Market Committee meeting, which would be the first half-percentage-point hike since 2000 during the dot.com bubble. It also may be the first of a few 50-basis-point increases this year, as the central bank aggressively attempts to rein in inflation.
However, yesterday’s retreat in Treasury market yields brought some bargain hunting in the higher-growth sectors—including technology and consumer discretionary—that have fallen recently on the rising borrowing costs concerns. The yield on the benchmark 10-year Treasury bond, which topped the 2.80% market earlier this week (more than a full-percentage point above where it was on March 1st), eased some yesterday and that brought some buyers back into the high-growth areas, with the NASDAQ Composite and the small-cap Russell 2000 rallying roughly 2% during yesterday’s trading session. In particular, it was a good day for stocks of the travel and leisure companies. That said …
There are still a lot of concerns for equity investors right now, including how restrictive the Federal Reserve will be on the monetary policy front this year, rising bond yields, and the continued geopolitical turmoil in Eastern Europe and its impact on the global oil supply. This uncertainty has made for a volatile three-plus months of trading on Wall Street to start 2022, in which not one of the 11 major equity groups at one time or another has been immune to a patch of selling. Until yesterday, the higher-growth technology sector had recently been hurt by the jump in Treasury market yields.
In general, we continue to recommend that investors maintain a well-diversified portfolio of high-quality stocks of companies with strong balance sheets and that generate ample cash flows. We think these companies are best positioned to weather any downturn in the U.S. economy. The early April inversion of the Treasury market yield curve, in which the rate on the two-year note exceeded that of the longer duration 10-year bond (a historically reliable predictor of a future recession), raised some concerns about a slowing U.S. economy.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
