This morning, the attention of Wall Street is on the April producer (wholesale) price data and what those figures indicate about the pace of inflation. At 8:30 A.M. (EDT), the Labor Department reported that the April Producer Price Index (PPI) rose 0.2% on a month-to-month basis and 2.3% over the last 12 months. The core PPI, which excludes the more volatile food and energy components climbed 0.2% and 3.2%, respectively. Much like yesterday’s companion Consumer Price Index data, the producer prices showed some moderation in inflationary pressures. Meantime, initial jobless claims for the week ending May 6th totaled 264,000 which was up sharply (+19,000) from the prior week period and the highest level since October, 2021. The equity futures, which were mixed heading into the economic releases, are still indicating an uneven opening, much like we witnessed yesterday.
Meantime, the stocks of the regional banks are under selling pressure in pre-market action. This was prompted by a regulatory filing from regional lender PacWest Bancorp (PACW) documenting that deposits declined about 9.5% during the week ended May 5th. This raised concerns about a liquidity crunch at the bank and some of the regional bank peers. The banking fears also are fueling the continued “flight to safety” strategy among investors. This news appears to be weighing on the equity futures and overshadowing the aforementioned PPI data.
It was a bifurcated session for stocks yesterday. The tech-dominated NASDAQ Composite finished 127 points (+1.0%) higher, while the large-cap dominated Dow Jones Industrial Average fell 30 points (-0.1%). It marked the 7th time in the last eight trading sessions that the index of 30 bellwether companies finished in negative territory. From a sector perspective, the higher-growth areas, primarily technology stocks, were helped by the CPI data, which showed a slight moderation in prices. The CPI report also pushed Treasury yields lower, which is a positive for the high-growth stocks. Conversely, it was a disappointing session for the cyclical groups and that played a big part in the Dow Jones Industrial weakness. The industrial stocks have struggled recently, which is not overly surprising given the recession concerns and a contracting manufacturing sector.
The increasing fears about a recession were fueled by yesterday’s Federal Reserve Bank of New York report showing that the odds of a recession stateside are now about 67%. That figure was up sharply from the bank’s previous forecast. New York Fed President John Williams also said that the likelihood of the central bank cutting rates later this year is very small. The recession concerns weighed on the economic-sensitive (cyclical) stocks, including the aforementioned industrial names, and prompted some movement into the more defensive areas.
The noted recession concerns and the subsequent search among investors for the growth companies, which are viewed as a priority holding during difficult economic times, are again pushing investors into the FAANG stocks. This group of mega-cap technology companies has recovered nicely from last year’s setback, with Apple (AAPL) trading near its all-time high. Fellow technology behemoth Microsoft (MSFT) also is in favor these days. This group of technology companies offers the potential for growth at a reasonable level of risk. This trend also speaks to the broader view on Wall Street that owning the stocks of the high quality companies that have a history of generating steady earnings growth and cash flows during difficult economic times is desirable in the current climate.
Speaking of high-quality names, Dow-30 component Walt Disney (DIS) reported its quarterly results after the close of trading yesterday afternoon. The entertainment giant posted adjusted earnings of $0.93 a share, on a 13% increase in revenues, to $21.82 billion. The earnings-per-share figure matched the consensus forecast, but the shares are trading lower in pre-market action on disappointing results from the Disney+ streaming app. The company reported that it reduced losses at its streaming service by increasing prices. However, Disney+ did lose four million global subscribers from the previous quarter, mainly due to cancellations in India. The dour streaming news overshadowed strength in the company’s theme parks business.
So what is an investor to do? If yesterday's intra-day trading following the CPI report showed anything, it was that more near-term choppiness should be expected. Stocks may get a boost if sentiment grows that the Federal Reserve may pause on the monetary policy tightening front next month. However, that has to be weighed against the prospects of a slowing economy, continued banking industry worries, and the possibility that the lawmakers on Capitol Hill will not reach an agreement by the early June deadline to raise the debt ceiling limit. The debt ceiling debate and an inability to reach a deal could cause some near-term volatility for stocks and bonds, much like it did in 2011 when it took lawmakers an extended negotiating period to come to an agreement. Given this backdrop, we still think investors would be wise to exercise caution. – William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
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