Stock futures imply a positive open to today’s trading. Pre-market, the U.S. Bureau of Labor Statistics reported employment data for the month of April showing an increase of 253,000 jobs, versus economists’ outlook of 185,000 and the previous-month, revised-downward figure of 165,000. The unemployment rate came in at 3.4%, marginally below the March level of 3.5%. Hourly wages advanced at a stronger 4.4% year-over-year pace, compared to 4.2% a month ago. Labor participation held steady at 62.6%. Despite the Federal Reserve’s best efforts to slow momentum in the economy, the jobs market remains vibrant. We note that this afternoon, St. Louis Federal Reserve President James Bullard will speak on the business environment and Fed policy, and the central bank will release consumer credit figures for the month of March, which are expected to indicate additional growth. We’re cautiously optimistic stocks can maintain positive momentum to the end of the trading day.
On balance, it looks as if the major market indexes will all finish this week on a down note. So far, the tech-heavy NASDAQ has held up the best. Earlier in the week, manufacturing, services, and construction spending data displayed a fair degree of resiliency, as did factory orders. Also, it was reported that domestic productivity declined, jobless claims held at a modest level, and labor costs rose at a persistently high rate. Altogether, this information led to lower stock valuations. At mid-week, stocks moved more decisively downward on Federal Reserve Chairman Jerome Powell’s comments regarding his inflation-fighting efforts. Too, on Thursday, new troubles in the regional banking sector were not constructive to market performance.
Wednesday afternoon, Mr. Powell announced another one-quarter percentage-point hike in short-term interest rates, to a range of 5.00%-5.25%, as was widely anticipated on Wall Street. The Fed Chairman was noncommittal to a pause in the rate strategy, beginning at the upcoming mid-June Federal Open Market Committee meeting. His words suggested no cuts in interest rates before 2024. Investors were generally disappointed, and moved some funds from stocks to safer holdings, that is, cash, gold, and Treasurys.
Several market pundits have voiced concerns that the central bank’s aggressive rate strategy soon will push the domestic economy into a downturn. The severity of which no one knows for sure, though we do not believe a harsh recession is likely. Higher rates have exposed mismanagement of operations on the part of a number of regional banks. Over the past few years, such banks have loaned out money at low fixed rates, and now they need to raise interest on customer deposits to maintain funding levels, leading to negative interest rate margins and net losses. Silicon Valley Bank, Signature Bank, and First Republic Bank collapsed, as clients pulled their deposits, and the Federal Deposit Insurance Corporation (FDIC) seized their assets, selling them to better-heeled industry players.
Lately, other regionals, including PacWest Bancorp (PACW), Western Alliance Bancorp. (WAL), and Zions Bancorp. (ZION), have come under financial stress, worrying customers, regulators, and Wall Street. Furthermore, Toronto-Dominion Bank (TD.TO) has walked away from a deal to buy First Horizon Corp. (FHN). Mr. Powell, Treasury Secretary Janet Yellen, and industry leaders, for example, JPMorgan Chase (JPM) chair Jamie Dimon, have tried to assuage market unease, saying that the regional problems are not systemic threats, a view we agree with. Nevertheless, uncertainty currently reigns in the stock market. Investors would do well to hold meaningful positions in cash, bonds, and top-quality equities for the time being. - David M. Reimer
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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