The equity futures are pointing to a higher opening for the U.S. stock market ahead of a busy few days of economic news, including today’s expected releases on May manufacturing activity from the Institute for Supply Management, and Jobs Opening and Labor Turnover (JOLTS) survey from the Labor Department at 10:00 A.M. (EDT), as well as the latest Beige Book summation of economic conditions from the Federal Reserve at 2:00 P.M. (EDT).
The economic data, including yesterday’s report of a modest decline in consumer confidence, have been mixed recently. The Conference Board’s Consumer Confidence report did show that the U.S. consumer, though continuing to spend, especially on services and reopening activities (e.g., travel and leisure), is showing concerns about higher inflation. Senior Director of Economic Indicators Lynn Franco said: "Looking ahead, expect surging prices and additional interest-rate hikes to pose continued downside risks to consumer spending this year."
Meantime, after the close of trading yesterday afternoon, investors received some important news from Corporate America, headlined by the latest quarterly results from Dow-30 component Salesforce (CRM). The technology company beat expectations on both the top and bottom lines, and the stock responded in kind in afterhours trading. CRM shares are likely responsible for nearly half of the gain the Dow futures are indicating at the start of trading today. Likewise, computer company HP (HPQ) reported strong fiscal second-quarter results, driven by business demand for its Hewlett-Packard branded laptop computers. HPQ raised its near-term prognostications despite continued supply-chain disruptions. The two reports were a positive reading on business spending amid the uncertain economic outlook. Shares of HPQ are relatively unchanged in extended-hours trading.
This news comes on the heels of the final trading day of May, a month that was a very volatile one for equities. The month fittingly ended with an uneven session, and the major equity indexes in negative territory. Fresh off of last week’s rally, the averages gave back a portion of Friday’s gains, hurt by a few factors, including news on the global energy market (more below) and hawkish commentary over the extended Memorial Day weekend from a prominent Federal Open Market Committee (FOMC) member, increasing fears of Federal Reserve interest-rate hikes.
Federal Reserve Governor Christopher Waller said he expects the 50-basis-point interest rate hikes to continue, and that he would support hikes that exceed the “neutral” level, currently pegged around 2.5% for the Fed’s benchmark borrowing rate. These comments were in contrast to growing sentiment last week on Wall Street that after the anticipated half-point hikes to the short-term interest rate at the June and July FOMC meetings, the central bank may slow the pace of increases, with the odds of a quarter-point hike at the September meeting growing.
The market had rallied late last week after the personal income and spending report showed a decline in inflation as measured by the core personal consumption expenditures (PCE) Index to 4.9% last month, from the 5.2% rate registered in March. It also marked the first pullback in the index, which is the Fed’s favorite gauge of inflation, in 17 months. It brought some thoughts that inflation may have peaked earlier this year. This gave a boost to some of the recently out-of-favor mega-cap technology stocks, including electric vehicle maker Tesla (TSLA) and retailing and technology behemoth Amazon.com (AMZN).
The oil market was a big story on Wall Street yesterday. Before the market opened stateside news broke that European leaders agreed to cut oil imports from Russia to the euro zone by 90% by year’s end. This caused a spike in crude prices both here and on the Continent. Then in the second half of the session oil prices gave back a portion of the earlier gains and then some on reports from the Middle East suggesting that OPEC+ members were discussing removing Russia from the confederation. Both of these reports had a whipsaw effect on crude quotations yesterday and brought more concerns about inflation.
Looking forward, the second half of this abbreviated trading week will bring a number of important reports on the U.S. economy, including Friday’s report from the Labor Department on May employment and unemployment. Wall Street will be looking at that report for signs of any slowdown in jobs creation, as the central bank tries to slow growth and attempts to combat inflation. The consensus expectation is that nonfarm payrolls expanded by 328,000 positions last month, which would be roughly 100,000 below the pace of jobs created in April.
So what is an investor to do during this extended volatile stretch of trading? We think investors may want to use the recent decline in valuations (the S&P 500 companies are trading at a price-to-earnings ratio that is well off of where they began the year) to initiate or add to their positions in a number of quality companies that are now trading at P/E ratios that are far below where they were less than six months ago.
The aforementioned recent price action in the stocks of Tesla and Amazon.com would suggest that the big institutional buyers and insiders are starting to increase their positions in some of the recently beaten down corporate names. Recent data show that corporate executives are buying stock in their own companies at the highest pace since March 2020. Some market pundits believe the uptick in insider stock purchases may be a sign that the market selloff has hit a bottom. Will this result in a better month of trading in June than we saw in May, especially for the tech-heavy NASDAQ Composite? We shall see.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
