Stock futures are showing a likely negative open to this new trading day. Prior to the open, the U.S. Labor Department released its initial jobless claims tally of 228,000 for the week ended April 1st, a level that was above economists’ consensus expectation of 200,000 and the prior-week level of 198,000. Continuing jobless claims for the week concluded March 25th jumped to 1.82 million, versus 1.69 million previously. This data relieves some of the concern about the still-wide gap between job openings (9.9 million) and people looking for work (5.9 million), reported on Tuesday. On balance, the employment environment remains fairly strong. Also this morning, investors will get a read on St. Louis Federal Reserve President James Bullard’s opinion on the economy and central bank policy.
Tomorrow, though the markets are closed for the Good Friday holiday, the U.S. Bureau of Labor Statistics will provide additional information on job additions, the unemployment rate, and wage growth for the month of March. We expect these data points to reinforce the latest thinking that, though currently strong, there are signs that demand for workers is beginning to soften. It’s worth noting that the Fed will provide February consumer credit figures, as well, which likely will show an increased reliance on revolving credit, as people whittle down their savings.
In this holiday-shortened week, it seems that the major market indexes will wind up turning in a flat performance, overall. The NASDAQ, Standard & Poor’s 500, and the Dow Jones Industrial Average may probably just tread water for most of this month, notwithstanding consumer and producer price data releases next week, while investors await the upcoming Federal Reserve meeting scheduled for early May.
Recent comments by Fed officials appear to point to another one-quarter percentage point hike in short-term interest rates, to the 5.00%-5.25% range. Many pundits on Wall Street are saying Fed Chairman Jerome Powell will then implement a pause in his inflation-fighting strategy to assess its effectiveness, thus far. We note that, since the failures of two regional banks last March, there have been no other as-severe foundering financial institutions, providing confidence, if the situation holds true, for the central bank to again lift rates. It’s arguable that the Fed could even impose a 25-basis-point hike in June, should the economy and inflation continue to display resilience.
Wall Street analysts and portfolio managers are trying to determine what types of stocks will perform best in the quarters ahead. One group argues that the Fed is close to ending the current rate-hiking cycle, and investors should build holdings in cyclical and riskier technology issues. Their opposition says there’s still much uncertainty, and they worry more rate increases may be necessary to bring inflation down to the Fed’s 2% growth target, sparking a recession. This opposing group promotes a defensive position, specifically, buying top-quality tech, consumer staples, and utility stocks. At this juncture, it might be best to split the difference, that is, maintain a diversified portfolio with roughly equal weightings of growth/cyclical and defensive equities. Note that our Asset Allocation Model suggests proportional holdings of 50% equities, 15% high-grade bonds, and 35% cash in most portfolios. – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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