This morning, we received some more economic news, but none of it was of the market-moving variety. At 8:30 A.M. (EDT), the Labor Department reported that initial jobless claims for the week ending May 13th totaled 242,000, which was down 22,000 from the previous week’s level, signals some tightness in the jobs market and may not be what the Fed would like to see in its battle to tame inflation. Treasury market yields rose following the unemployment claims data. Meanwhile, the Philadelphia Fed reported that its survey of factory activity in the greater Philadelphia area was -10.4. That followed an even more dour Empire State manufacturing survey reading of -31.8 from the New York Federal Reserve Bank on Monday. Today’s economic data did not quell concerns about a slowing U.S. manufacturing sector. The equity futures, which were little changed with a slightly positive bent heading into the releases, are pointing to a mixed opening to the trading day stateside. The Dow-30 futures are modestly lower, while the contracts for the S&P 500 Index and the NASDAQ Composite are holding slight gains.
The reports on the economy have been mixed this week. In addition to today’s releases, we learned that the pace of April retail sales (+0.4%) came in at half the consensus forecast. On the housing front, a modest improvement in builder sentiment and a nominal increase in housing starts were somewhat offset by lackluster building permits data, which is an even more forward-looking indicator of construction activity in the residential market. Later this morning, at 10:00 A.M. (EDT), we will get data on April existing home sales. A sense that the economy is heading into a mild recession, at the very least, is offsetting any boost stocks are getting from growing sentiment that the Federal Reserve will pause on the interest-rate front at its two-day monetary policy meeting, commencing on June 13th.
We also received some notable quarterly reports since the close of trading yesterday. The headline release yesterday afternoon came from Cisco Systems (CSCO). The technology company posted earnings per share of $1.00, topping the consensus forecast by a few cents, on better-than-expected revenue growth. However, Cisco shares are trading lower in pre-market action, as investors are reacting negatively to lowered full-year prognostications, with the networking gear maker citing slowing demand for its products. This morning, Walmart (WMT) posted adjusted earnings per share of $1.47, up 13% from the year-earlier period and well ahead of the Wall Street consensus forecast of $1.31. Revenues were up 7.6%, to $152.3 billion, again topping estimates. Shares of the retailing behemoth are indicating a higher opening, powered by the April-period results and raised forecasts for the full fiscal year.
First-quarter earnings season, which has seen nearly 80% of the S&P 500 companies report positive earnings-per-share surprises, is coming to an end. This week the focus has been on the retailers. On that front, both Home Depot (HD) and Target (TGT) reported solid earnings results, but issued disappointing second-half outlooks, citing some concerns about a drop in consumer spending on discretionary items. In general, results from those two companies, as well as off-price retailer TJX Companies (TJX), have revealed consumers are turning away from non-essentials, such as electronics and home goods, in the face of high inflation. Given this sentiment, we would recommend that investors tread carefully with the retailing stocks—though they did well yesterday in an up tape for the market—as the consumer cyclical sector typically does not perform well (on a relative basis) during more difficult economic times, which may lie ahead in the second half of this year.
Investors also are closely monitoring the debt ceiling negotiations from Capitol Hill. In recent days there has been some reported progress at the bargaining table, and that gave a lift to equities during yesterday’s session, which saw the Dow Jones Industrial Average, the NASDAQ Composite, and the broader S&P 500 Index climb 1.2%, 1.3%, and 1.2%, respectively. The small-cap stocks, which tend to lead the market in one direction, posted an outsized gain, with the Russell 2000 jumping 2.2%. A failure to come to a deal would jeopardize the U.S. credit rating, and thus we think an accord will be reached, even if it is of the shorter-term variety. The last time, raising the debt ceiling got very contentious in Washington D.C. in 2011, it should be noted that the S&P 500 Index fell nearly 17% in value. So this fluid situation should be closely watched, especially for those in riskier assets.
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
CLICK HERE for more information on our services or call 1-800-VALUELINE (1-800-825-8354). Our account managers are available Monday through Friday, 8:00 AM to 6:00 PM Eastern Time.
