The major equity averages fell yesterday, with the selling prompted by testimony from Federal Reserve Chairman Jerome Powell before Congress. The Fed leader said that the central bank will likely need to continue raising interest rates after pausing at last week’s June Federal Open Market Committee (FOMC) meeting. Mr. Powell said that inflation remains sticky in a number of areas and with the labor market still tight (the May unemployment rate was at 3.7%), the central bank may need to further tighten the monetary reins to slow growth and hopefully push prices lower. Earlier today, we learned that the Bank of England raised its benchmark short-term interest rate by a half-point, citing stubbornly high inflation in the United Kingdom. The market was looking for a quarter-point increase and the major bourses in Europe sold off on the news.
Treasury market yields rose on Chairman Powell’s comments and stocks sold off yesterday, with the biggest pullback coming in the higher-growth and more interest-rate sensitive technology sector. The NASDAQ Composite was the biggest laggard, falling more than 1% on the day, while the Dow Jones Industrial Average, the broader S&P 500, and small-cap Russell 2000 suffered modest losses. Equity futures, which were lower heading into the Thursday morning release of initial jobless claims and related labor data, likely on Fed Chairman Jerome Powell’s monetary policy comments and the Bank of England’s interest-rate decision, are now indicating some modest selling when trading kicks off stateside.
This morning, we will receive some important economic reports, with the noteworthy releases (i.e., existing home sales and the leading economic indicators) coming a half-hour into the trading session. The housing data, including a recovery in May housing starts and building permits, has improved in recent months, despite 30-year mortgage rates still hovering close to 7.00%. And, after yesterday’s closing bell, homebuilder KB Home (KBH) posted better-than-expected May-quarter results, much like Lennar (LEN) did on Tuesday. KB Home shares, which have surged over the last 12 months, are trading modestly lower in pre-market action. At 8:30 A.M. (EDT), we did learn that initial jobless claims for the week ending June 17th came in at 264,000. That reading matched the revised prior-week figure.
The attention of Wall Street is likely to be on the Federal Reserve again today, as Chairman Powell will resume his testimony before Congress. We were also scheduled to get additional monetary policy remarks from Richmond Fed President Thomas Barkin and Cleveland Fed President Loretta Mester. Mrs. Mester has often taken a hawkish stance on interest-rate policy, so we can’t rule out some more profit taking today, especially in the tech-heavy NASDAQ 100 Composite. Mr. Barkin has historically been a centrist when it comes to monetary policy.
So what is an investor to do in an environment where the Fed is showing signs that it wants to continue raising interest rates, even if the market doesn’t believe multiple hikes are likely? The quick answer would be to avoid the higher-growth stocks and look at the value names that are less rate sensitive. However, investors should note that the inverted Treasury yield curve continues to steepen, with the spread between the two- and 10-year Treasury notes nearly a full percentage point this morning. That is usually a sign that Wall Street thinks some economic struggles lie ahead, which is not ideal for the value-oriented cyclical stocks. Given these differing variables and the uncertainty it has raised, we continue to recommend that investors don’t target a specific sector, but concentrate on the stocks of high-quality companies with strong balance sheets that have demonstrated a history of generating steady earnings and cash flow growth. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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