The major U.S. stock indexes will start the new week in unfamiliar territory. That is because the averages suffered their first losing week in quite some time and delivered their worst performance in three months. For the abbreviated four-day stretch (the market was closed last Monday for the Juneteenth holiday), the Dow Jones Industrial Average was down 1.7%, while the tech-dominated NASDAQ Composite and the broader S&P 500 Index both fell 1.4%. The small-cap Russell 2000 dropped 2.9%, which is noteworthy, as the small-cap stocks often tend to lead the market in one direction. The equity futures are indicating some more selling at the start of trading stateside. This selling was prompted by some hawkish monetary policy commentary from Federal Reserve Chairman Jerome Powell before Congress last week.
In his two days of testimony, the Fed leader said the central bank may need to raise the benchmark short-term interest rate a few more times to effectively fight inflation. Mr. Powell said that core inflation, which excludes the more volatile food and energy components, remains sticky. Chairman Powell’s posture also was shared by a number of Federal Reserve Presidents who held press conferences last week, including noted hawk Cleveland Fed President Loretta Mester. The commentary weighed on the more interest-rate sensitive sectors, which was why the small-cap Russell 2000 underperformed the large-cap indexes. Some of the technology darlings of Wall Street this year--NVIDIA (NVDA), Microsoft (MSFT), and Tesla (TSLA) to name a few—took a breather and succumbed to some late-week profit taking. Those companies have benefited from Wall Street’s focus on artificial intelligence (AI).
Speaking of AI, this morning we learned that International Business Machines (IBM) has agreed to acquire cloud software company Apptio (APTI) from Vista Equity Partners for $4.6 billion in cash, in the latest deal to bolster its capabilities in cloud and AI. It will finance the transaction with cash on hand and expects the deal to close in the latter half of this year. IBM stock is down marginally in premarket action.
Meantime, Wall Street does not seem convinced that the central bank will raise the federal funds rate at least two more times this year, despite several FOMC voting members favoring multiple increases over the rest of this year. The reason for the skepticism is that Chairman Powell continues to say that the Federal Reserve’s monetary policy decisions will be data dependent. Before the Federal Open Market Committee (FOMC) convenes in late July, there will be several more readings on inflation, which many economists and Wall Street pundits think will show a continued easing in prices. At the end of this week, we will get a very important reading on inflation that may very well play a huge part in which way the markets end the month of June.
This Friday, the investment community will be focused on the May personal income and spending report from the Bureau of Economic Analysis. That release includes the Personal Consumption Expenditures (PCE) Price Index, which is the most closely tracked inflation indicator by the central bank. This data will play a big part in the Fed’s next monetary policy decision, which most Wall Street observers think will bring a quarter-point hike to the federal funds rate, to a range of 5.25% to 5.50%. The expectation is that the core PCE Price Index increased by 0.3% last month (which would be an improvement from the April tally) and 4.4% on a 12-month basis. But before we get to the personal income and spending report on Friday, we will receive fresh data on durable goods orders, new home sales, and consumer confidence tomorrow and pending home sales and unemployment claims on Thursday. There are no economic releases scheduled for today.
As we noted last week, with all the uncertainty about how aggressive the Fed will be on the monetary policy tightening front, we continue to recommend that investors maintain a well-diversified portfolio of stocks, along with a healthy amount of cash and a sprinkling of bond holdings. On the equity side, we recommend investing in high-quality companies with strong balance sheets and a history of generating solid earnings and cash flows, particularly in periods of slowing economic growth. – William Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
CLICK HERE for more information on our services or call 1-800-VALUELINE (1-800-825-8354). Our account managers are available Monday through Friday, 8:00 AM to 6:00 PM Eastern Time.
