Stock market futures are pointing to some relief today on Wall Street. This week, through Thursday’s close, the blue-chip Dow Jones Industrial Average is down 3.5%, the broader Standard & Poor’s 500 Index is off 4.7%, and the technology growth-focused NASDAQ has declined by 6.3%.
Driving stocks lower were the Producer Price Index and the Consumer Price Index reports, which showed persistently strong inflation for the month of April. Supporting high consumer goods and services prices are resilient demand, tight supplies, and rising wages. Domestic consumers are still flush with stimulus funds received from the government during the early part of the pandemic, and continue to spend. The global supply chain is under duress due to the ongoing Russia-Ukraine conflict and strict COVID-19 lockdowns in China, most visibly affecting the availability of metals, energy commodities, semiconductors, and grains. Stubborn shortages of workers are forcing companies to pay up for staff.
Meanwhile, investors are worried that the Federal Reserve will implement an especially aggressive strategy in raising short-term interest rates and reducing its balance sheet via bond maturities. This morning, the University of Michigan will release data on consumer sentiment; a modest decline seems likely.
We expect the impact of the Fed’s pullback in liquidity to become more apparent in the coming months. Already there is anecdotal evidence that consumers are shifting to lower-priced hard goods and groceries, taking shorter driving trips, selectively putting off long-distance air travel, and visiting sit-down restaurants less to save money. Wage hikes have been lagging overall inflation. In the second half of this year, growth in inflation may well begin to taper, given comparisons against elevated prices in 2021; Fed action should help, as well. A rising number of economists are becoming concerned that a recession is unavoidable. Consumer and corporate balance sheets remain in fairly good shape, thanks to higher pay and earnings, so we believe their spending and investment budgets will not drop off dramatically. Thus, any downturn should be rather mild.
In Thursday’s trading, the major market indexes recouped nearly all of their losses suffered earlier in the day. Heading toward the close, the healthcare, real estate, consumer discretionary, and communications sectors were up, while the technology, utility, consumer staples, financial, materials, transportation, and industrial groups posted losses. Gainers included Amazon.com (AMZN), Charter Communications (CHTR), Netflix (NFLX), and Moderna (MRNA), increasing 1.5%, 3.8%, 4.8%, and 5.5%, respectively, in share price. Stocks losing value for the day were AmerisourceBergen (ABC), giving back 6.0%; Boeing (BA), enduring a 4.8% slide; American Express (AXP), down 3.8%, and Apple (AAPL), declining 2.7%.
The stock market is in a bottoming process, and will likely need some good news, either on the global political or economic front, before turning decidedly positive. Investors looking to put some cash to work ought to be conservative, limiting purchases to high-quality equities with reliable revenue, earnings, and cash flow growth.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
