Stock futures are pointing to a mixed opening today. Initial unemployment claims figures were announced this morning. They came in at a very low 166,000, which was no surprise, given persistent worker shortages within a still-healthy goods-and-services demand environment. This afternoon, investors will parse new information on consumer credit (February) and more detailed weekly data on the Fed’s balance sheet. Tomorrow morning, wholesale inventory levels for February will be unveiled.
Positive momentum in U.S. equities held up well at the start of this week, on Monday, despite lower reported factory orders for the month of February. Orders were in line with economists’ expectations. Then, on Tuesday, share prices fell, following comments by Lael Brainard, who is in line to become the Federal Reserve’s Vice-Chairwoman, when she suggested that the central bank would take a more aggressive stance toward fighting inflation than Wall Street is anticipating. That offset a favorable reading of the Institute for Supply Management’s survey of purchasing managers, which indicated solid expansion of the service sector in March, following three months of weak data. The mid-week release of minutes from the Fed’s March 15-16 meeting underpinned an uptick in market volatility. Those minutes revealed that Fed board members are considering one or more short-term rate hikes of .50 of a percentage point in upcoming meetings. Last month, the Fed implemented a one-quarter-point increase. Additionally, the record showed that the central bank is looking to reduce its $9 trillion balance sheet by as much as $95 billion a month over the next few years. We would not be surprised to see the balance sheet decline to near $4 trillion, over time, which was the level during the period prior to COVID-19’s emergence.
In Wednesday’s trading, decliners outnumbered advancers by about three to one, and stocks ended the day down, overall. Sectors gaining included utilities, healthcare, real estate, consumer staples, and energy, reflecting conservative positioning on the part of investors. Among the top advancers were drug maker Eli Lilly & Co. (LLY), independent power producer NRG Energy (NRG), and electric utility Exelon Corp. (EXC), up 4.6%, 4.2%, and 4.0%, respectively. Consumer discretionary, technology, financials, communications services, materials, and transports were sectors losing ground. Visible decliners included cruise ship company Norwegian Cruise Lines (NCLH), gambling and racing business Penn National Gaming (PENN), and casino operator Caesars Entertainment (CZR), posting respective declines of 6.8%, 6.7%, and 6.7%. The yield on the 10-year Treasury bond, a key determinant of consumer borrowing rates, increased above 2.6%.
Inflation has been a drag on the economy. Next week, a new earnings season will begin, with banks in the forefront. Companies will provide a clearer indication of the severity of cost pressures. We expect a good showing for the March quarter. Solid business momentum ought to extend into the current quarter. Assuming that the Fed can get rising prices and wages under control, corporate earnings should hold up in the second half of this year, though the rate of growth will probably ease from that of 2021. In the short run, reduced liquidity in the economy, as a result of Fed actions, will not be supportive of stocks. That said, if the Fed meets with success in containing inflation, investor optimism could prevail. Of course, the military conflict in Eastern Europe, with its implications for the global economy, remains a wild card. As we have stated previously, investors would do well to play the long game. Over time, equities prices tend to rise. Companies and consumers are in sufficient financial shape to weather a possible slowing of the economy.
– David M. Reimer
At the time of this article’ writing, the author did not have positions in any of the companies mentioned.
