Though stock futures are pointing to a positive opening today, the domestic stock market indexes appear headed toward another week of declines.
This morning, investors will get fresh readings for the month of May on industrial production, capacity utilization, and leading economic indicators. Economists expect industrial production to advance 0.4%, month to month, versus a growth rate of 1.1% in April. They look for capacity utilization to come in near the 79.3% level, which would be a decent showing, albeit not exceptional; utilization was 79.0% in the previous month. The consensus looks for a 0.4% contraction in leading economic indicators, compared to a 0.3% narrowing in April.
It would probably take a measure of good news to support market gains for today. Reflecting investors’ gloomy mood, the Standard & Poor’s 500 has joined the NASDAQ in bear market territory, and the Dow Jones Industrial Average is close to doing the same. (A bear market is marked by a 20% or more decline from a recent high.)
This week was flush with May economic data. The New York Federal Reserve reported high one- and three-year inflation expectations of 6.6% and 3.9%, respectively. U.S. producer prices advanced a strong 0.8%, month to month, in line with economists’ outlook. Monthly retail sales fell 0.3% and, excluding the automotive sector, expanded 0.5%. Both of these indicators were worse than the forecasts. Fewer building permits and housing starts depicted an easing of the real estate market. The Philadelphia Fed’s manufacturing index reading for June indicated a contraction is taking place in the mid-Atlantic region. On a positive note, jobless claims, at 229,000 for the week ending June 11th, remained quite modest. The Federal Reserve’s Wednesday announcement of a 0.75-percentage-point hike in short-term interest rates gave the stock market a short-lived shot in the arm, as investors cheered the more aggressive move to bring raging inflation under control.
Recession fears are mounting, as was reflected in Thursday’s dismal stock trading. All eleven market sectors posted losses. Consumer staples issues faired the best, while the consumer discretionary and energy sectors showed the most weakness. Retail giant Walmart (WMT) rose 1.0% in share price, household products company Church & Dwight (CHD) posted a 0.85% advance, and provider of brand name packaged goods Procter & Gamble (PG) gained 0.61%. Most prominent among declining issues were the cruise line stocks, Carnival (CCL), Norwegian (NCLH), and Royal Caribbean (RCL), each falling more than 11%. Also, electric car manufacturer Tesla (TSLA), computer graphics company Advanced Micro Devices (AMD), and passenger carrier United Airlines (UAL) all suffered share-price losses of greater than 8%. In the day, declining stocks vastly outnumbered those rising in value.
Caution is warranted. It’s too early to tell whether the Federal Reserve is being overly aggressive in the fight against inflation. In the months ahead, new pricing data should provide a clearer picture. Consumers, believing we are already in a recession or that one is on the horizon, are becoming more frugal, at least regarding purchases of everyday items. That said, overall spending, on their part, is still healthy, and is now more weighted toward services rather than durable goods. Aside from monitoring consumer sentiment and spending, investors will be keeping a close eye on the next corporate earnings season starting in mid-July. Many market pundits think analysts’ income estimates for the rest of 2022 are too high. In the meantime, we advise maintaining a focus on high-quality equities of companies with strong cash generating capability.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
