Investors have a lot to digest this morning, including another round of data on the U.S. economy and some notable corporate earnings reports. This comes on the heels of yesterday’s release of the minutes from the Federal Reserve’s latest monetary policy meeting, which sparked a late-session rally, and will likely impact trading again today, given Wall Street’s focus on inflation and the role the central bank will play in trying to rein in prices via a more-restrictive monetary policy course. The futures markets based on stock indexes are suggesting a higher start to the trading day stateside.
On the economic front, the Commerce Department released its first revision to the March-quarter Gross Domestic Product (GDP) estimate, with the figure moving only from -1.4% to -1.5%. The Personal Consumption Expenditure Index (PCE), a measure of U.S. inflation that tracks the change in prices of goods and services purchased by consumers throughout the economy, was little changed at +5.1% for the 12-month period. The first-quarter GDP retreat (now calculated at -1.5%) and some recent disappointing reports, including respective drops of 2.4% and 16.6% in April existing and new home sales, have brought worries about a slowing economy.
Investors are skittish over recent action in the U.S. Treasury securities market. There is now a smaller difference between the interest yield on short- term vs. long-term bonds. When this lessening of the “slope” of the graph of the yields occurs, known as flattening of the Treasury yield curve, takes place, it is typically an indication that investors and traders are worried about the macroeconomic outlook. On the positive side, initial weekly unemployment claims, at 210,000 for the week ending May 21st, remain at low levels and represent an improvement from the previous week.
There were some very important releases from the corporate world since yesterday’s closing bell. Wall Street was focused on the latest results from NVIDIA (NVDA), and did not like what it saw in the release. Although the technology giant, which manufactures computer graphics hardware and components, beat expectations on both the top and bottom lines, the stock dropped sharply in after-hours trading on the firm’s weaker-than-expected fiscal second-quarter forecast. The investment community has not been kind to the tech companies with high stock valuations when they’ve lowered their prognostications. The same fate is being shared by Snowflake (SNOW), which is falling on a weaker outlook. The technology stocks, as a whole, have been repriced downward on worries about higher borrowing costs going forward.
Corporate America did deliver some strong quarterly results from several retailers, including Williams-Sonoma (WSM), Macy’s (M), Dollar General (DG), and Dollar Tree (DLTR). In general, the retailers posted strong top- and bottom-line results and issued encouraging outlooks for the current quarter. The stocks are up nicely in pre-market action and are giving a boost to a consumer discretionary sector that has been under pressure lately, due to worries about the U.S. economy and in particular inflation. These reports support the latest assessment from the Federal Reserve that the U.S. economy is expected to “grow solidly” in the second quarter.
Meantime, Twitter (TWTR) is in the headlines again, and the stock is up in pre-market action. This is a reaction to reports that Elon Musk is dropping plans to partially fund his purchase of the social media company with a margin loan tied to his Tesla (TSLA) stake and increasing the size of the deal’s equity component to $33.5 billion. Mr. Musk will provide an additional $6.25 billion in equity financing for the $44 billion buyout, according to a regulatory filing with the SEC. Twitter shares have been under pressure lately after Mr. Musk said the deal is on hold, but the latest news suggests the transaction is moving forward. Staying on the merger and acquisition front, we learned that semiconductor giant Broadcom (AVGO) has agreed to acquire cloud-computing company VMware (VMW) in a deal valued at $61 billion.
The economic and earnings data are likely to impact trading at the start of the session today, but the main theme on Wall Street these days is: “Don’t fight the Fed.” The central bank’s more hawkish commentary and restrictive monetary course are pressuring equities, which have historically not performed as well during periods of Fed interest-rate hikes and resultant higher borrowing costs for auto and home loans and corporate borrowings.
The latest Federal Open Market Committee (FOMC) minutes showed that the central bank plans to raise the short-term interest rate by a half-percentage point at both its June and July FOMC meetings, which the market has anticipated. However, Wall Street is now thinking that a quarter-point hike is more likely at the September FOMC meeting. That, along with the minutes showing that the lead bank could alter its course toward pushing the benchmark federal funds rate to the neutral level (around 3.00%), if economic conditions warrant, was greeted positively by an investment community that is clearly looking to exit riskier assets these days. In fact, the S&P and the Dow Jones Industrials are on track for their worst first 100 trading days since 1970, and for the NASDAQ, it’s the worst ever start to a year. Given these trends.
We continue to recommend that investors maintain a well-diversified portfolio of quality companies. During periods of increased volatility, there is risk for investors who focus too much on a particular sector of the economy. Thus, we believe individual stock-picking of companies with strong balance sheets and ample cash flows should prove the better strategy, along with keeping a healthy portion of one’s portfolio in cash. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
