The U.S. equity market, fresh off a notable bargain-hunting rally to start the week, put in a choppy session yesterday, with late-session selling pushing the major equity averages into negative territory by the closing bell. The lack of major economic and earnings news had investors once again focused on inflation and the role the Federal Reserve is playing in the fight to stabilize prices. The debate about whether the more-restrictive monetary policies implemented by the central bank will result in a “hard landing” for the economy in the form of a recession was also on investors’ minds and that added to the uneven performance for stocks. This choppiness is apt to continue today, as the futures, which were lower earlier this morning, are now suggesting a modestly higher start to the trading day stateside.
This morning, it was another light slate of economic news, and what we did receive is certainly not going to take Wall Street’s focus away from inflation and the growing recession debate among market pundits and economists. At 8:30 A.M. (EDT), the Labor Department reported that initial jobless claims for the week ending June 18th came in at 229,000, which was up modestly from the previous week’s figure.
The economic news will ratchet up tomorrow, with the latest data on new home sales and the revised June reading on June consumer sentiment from the University of Michigan. Recall that the preliminary reading on consumer sentiment earlier this month was the lowest on record and rattled the U.S. equity market. If both reports were to disappoint tomorrow, it may bring more concerns about the Fed’s ability to navigate a “soft landing” for the U.S. economy. Yesterday, Fed Chairman Jerome Powell said that task is growing more difficult.
The increasing worries about stagflation (a period where inflation is high, while the economy is slowing and the rate of unemployment is increasing) or a recession down the road weighed on the energy sector yesterday. The price of crude oil both here and in Europe fell sharply yesterday on worries about demand falling if the economy were to continue weakening. Overall, stocks in the energy sector are down nearly 15% thus far in June. The economic worries also pressured bond yields, as nervous investors sought some safe-haven instruments. The falling yields, which retraced some of the gains registered following last week’s Federal Open Market Committee’s decision to raise the benchmark short-term interest rate by 75 basis points, helped the technology stocks. The higher-growth tech names also tend to be more appealing for investors over the cyclical value-oriented companies in a slowing economy.
Our sense is that choppy trading sessions will be more the norm than the exception over the next fortnight and ahead of some important inflation readings in a few weeks and the commencement of second-quarter earnings season. With Fed Chairman Jerome Powell reiterating before Congress yesterday that the central bank will remain data-reliant in making its monetary policy decisions, this will put extra attention on the forthcoming inflation numbers, including next week’s Personal Consumption Expenditure (PCE) reading on core inflation, a measure closely monitored by the Fed in its inflation assessment.
Meantime, the financial sector will be in Wall Street’s focus today, as we will receive the latest round of banking stress test reports. Chairman Powell yesterday reiterated that the U.S. Banking System is strong and well capitalized and can withstand a slowing economy. If the results from the stress tests confirm Mr. Powell’s stance, it may give a modest boost to the financial stocks, which have struggled recently, and from a broader perspective quell some of the growing concerns that a possible recession would leave the tightening financial system in a more vulnerable position.
So what is an investor to do in a choppy market, where broad-based sector investing may not damp volatility, given the swift and oftentimes pronounced daily moves in the direction of trading? We think individual stock picking with a focus on companies that have strong balance sheets, generate ample cash flows, and return cash to shareholders, via dividends or share buybacks, will find investments that are best positioned to weather a slowing economy and/or possible recession down the line. Value Line with its stock-screening capabilities can make such an arduous and at times time-consuming task of identifying such stocks quite easy.
This week, we have seen some signs of investors bargain hunting. In many instances, Wall Street appears to be targeting the high-quality stocks of companies with good fundamentals that were oversold in the recent broad-market selloffs. In addition to maintaining a well-diversified portfolio of quality stocks, we also recommend keeping a healthy portion of cash. With inflation data still running high and the Federal Reserve wedded to raising interest rates expeditiously over the next 12 to 18 months, fixed-income holdings (the price of a bond moves inversely to its yield) are not very appealing right now.
− William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
