Stock futures suggest a positive opening today. There are no significant economic data releases scheduled for today. Through Thursday’s close, for this week, the major market indexes were collectively down about 3%. The Dow Jones Industrial Average (DJIA), Standard & Poor’s (S&P) 500, and the NASDAQ generally traded within a close range of each other over the four-day span.
Notably, the S&P 500 is close to joining the NASDAQ in bear market territory (i.e., a decline of 20% or more from the recent high). Year to date, the DJIA and S&P 500 are down in the teens, percentagewise, and the NASDAQ is off by more than 27%.
Investors have been most concerned about the high current rate of inflation for goods and services, employee wage gains, and how aggressive the Federal Reserve will be in reducing liquidity via short-term rate hikes and the roll off of bond holdings on its balance sheet by way of maturities.
Yesterday, investors parsed some additional economic statistics. Initial jobless claims for the week ending May 14th increased, but stayed in the modest 200,000 range; 218,000, to be exact. A majority of companies are still having trouble filling job positions, and workers are vying for better benefits. Existing home sales ticked lower in April, to 5.61 million, marking the third straight month of declines. Not surprisingly, the inventory of homes available for sale remains tight, keeping prices elevated; rising mortgage rates also are pressuring the sector. Leading economic indicators for the same month pointed to domestic weakness, mainly due to reduced consumer expectations and fewer residential building permits. The Conference Board report raised concerns about inflation, rising interest rates, and ongoing supply-chain disruptions, exacerbated by the Russia-Ukraine conflict and COVID-19 shutdowns in China. Still, the report concluded that the United States should sustain moderate economic growth, at least through yearend.
Recession worries further stressed the stock market on Thursday. Only three sectors posted gains. They were: healthcare, consumer discretionary, and materials. Those losing value included technology, financials, industrials, communications, transports, utilities, consumer staples, and energy. On a positive note, advancing stocks outnumbered decliners by a factor of 1.5, showing some underlying strength in the broader market. Software developer Synopsys (SNPS) posted a 10.3% share-price increase, drug researcher BioNTech (BNTX) stepped up 6.9% in value, and generator manufacturer Generac (GNRC) gained 6.6%. Market support was offset by telecom equipment maker Cisco Systems (CSCO), household products company Clorox (CLX), and retailer Target (TGT), recording share-price losses of 13.7%, 5.3%, and 5.1%, respectively.
Wall Street pundits are now debating whether stocks are in a “correction” or a “bear” market. The former situation typically entails a months-long recovery, while the latter often involves years of pain before any meaningful relief. We believe that a “correction” is the more suitable label for the current environment, but it’s not yet safe to call a market bottom. Thus, investors would do well to stick with top-quality stocks, typically having solid operating track records and flush cash flows throughout the business cycle.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
