The equity futures market is indicating another move lower this morning after yesterday’s severe drop. Weekly economic news apparently will have little impact on the trend. We received some new data on the economy before today’s opening bell, but none that drew the attention of Wall Street away from the Federal Reserve and the inflation situation (more below).
At 8:30 A.M. (EDT), the Labor Department reported that initial jobless claims for the week ending May 14th came in at 218,000, up 21,000 from the previous week’s revised figure, but still running at a very low level. We also learned that manufacturing activity in the greater Philadelphia area declined from 17.6 in March to 2.6 last month, the weakest reading since 2020. This manufacturing figure adds to the growing concerns about the overall health of the U.S. economy.
The U.S. equity market sold off sharply yesterday, with all of the 11 major sectors finishing in negative territory in a session that wiped out all of the recent rally and then some. There was a clear movement out of risky assets and into investments regarded as safer. On a relative basis, the utilities were among the best performing sectors during yesterday’s very bearish session. The sizable selloff was promoted by comments from Federal Reserve Chairman Jerome Powell on Tuesday afternoon. Mr. Powell said that the central bank will remain very aggressive on the monetary policy tightening front to combat inflationary pressures not seen in multiple decades. These hawkish comments unnerved investors and sparked the broad-based selloff that is likely to continue this morning, as the futures are in negative territory. Yesterday’s market rout, which included respective declines of 3.6%, 4.0%, and 4.7% for the Dow Jones Industrial Average, S&P 500 Index, and NASDAQ Composite, once again hit the higher-growth stocks the hardest.
It was not just talk from Federal Reserve officials that has roiled the broader market, but also some disappointing quarterly results from the retailing giants. On the heels of a dour report from Walmart (WMT) on Tuesday, investors received disappointing data from fellow mass merchandiser Target (TGT) and home improvement giant Lowe’s (LOW) before yesterday’s opening bell. In a nutshell, those companies noted that inflation on the cost side of the business is starting to weigh on profit margins on their goods and ultimately on their bottom lines.
The discouraging retail data unnerved investors because it was taken as a sign that the U.S. consumer is starting to feel the ill effects of rising costs, especially for food and energy, and that is cutting into the spending on discretionary items. It also added credence to the University of Michigan’s preliminary May reading on consumer sentiment (released last Friday), which fell to its lowest level in more than a decade and showed a big drop in spending on big-ticket items. Not surprisingly, the consumer discretionary group was the biggest laggard during yesterday’s outsized selling. Later this morning, at 10:00 A.M. (EDT), we will get data on April existing home sales from the National Association of Realtors and the leading economic indicators from the Conference Board. The housing data will be watched closely for signs of how big an impact surging mortgage rates are having on home sales. In recent weeks, the stocks of the homebuilders and the housing-related companies have sold off sharply on rate concerns and possible affordability issues for buyers down the road. A drop in April housing starts and building permits contributed to yesterday’s additional step down for the homebuilders.
After yesterday’s closing bell, the latest quarterly results from Cisco Systems (CSCO) added to the technology sector woes. The semiconductor giant reported as-expected earnings, but a disappointing top-line showing and reduced near-term predictions for the company’s operating performance have the tech stock trading sharply lower in pre-market action. The inflationary pressures and resultant higher borrowing costs, the latter of which may continue to rise as the Federal Reserve remains wedded to raising interest rates aggressively and reducing its balance sheet to rein in inflation, took another big bite out of the technology stocks yesterday. The NASDAQ Composite is now down more than 30% from its record high. And even more alarming is that the mega-cap names, like Apple (AAPL), are now succumbing to the downward revaluation of equity prices taking place on Wall Street.
We think the recent signs of weakness in the consumer and homebuilding sectors, which are the largest contributors to the nation’s gross domestic product, bear close watching, as a continued deterioration in these pillars of the U.S. economy will make it harder for the Federal Reserve to stay the course of raising interest rate to rein in inflation. It also raises the possibility of a period of stagflation, where stubbornly high inflation occurs at the same time as economic growth is slowing and unemployment begins to rise. The Federal Reserve remains on the record saying it can rein in inflation without risking a deterioration of the labor market, but with many economists thinking the economy may be headed toward a recession, possibly next year, Wall Street remains skeptical that the central bank can navigate a soft landing for the U.S. economy. It should be noted that the Dow Jones Transportation Index, which is seen as a bellwether for the U.S. economy’s performance, fell 7% yesterday, to its lowest level since June, 2020.
So what is an investor to do in this very volatile and quite difficult stretch for stocks? We would not panic sell and instead use the recent selloff to initiate some positions in the recently out-of-favor blue-chip issues. It is worth noting that in turbulent times for the market, the stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line have historically performed better than the broader market.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
