This morning, investors had their eyes on Europe and the continued meetings between President Biden and North Atlantic Treaty Organization (NATO) members. Reports that the United States has agreed to increase its military presence in Europe and, along with its allies, ramp up sanctions on Russia, and the likelihood this will bring a reaction from Russia are roiling investors. The fallout from the high tensions between the world’s superpowers is likely to be further disruptions to the global energy supplies, elevated oil prices, and more inflationary pressures for businesses and consumers to absorb. The equity futures were notably lower on the overseas news before a number of important economic releases. There appears to be a notable “flight-to-safety” move taking place on Wall Street today.
At 8:30, we learned from the Bureau of Economic Analysis that personal income and spending for the month of May rose 0.5% and 0.2%, respectively. But what investors zeroed in on was the latest reading on the Personal Consumption Expenditure (PCE) Index, which is closely monitored by the Federal Reserve as a gauge of inflation. That PCE Index, much like last month, was very strong, headlined by a 12-month advance of 6.3%. This, along with respective month-to-month gains in the PCE and core-PCE of 0.6% and 0.3% has not changed the inflation narrative and the futures are still notably lower. Investors also should note that the Organization of Petroleum Exporting Countries (OPEC) is scheduled to meet later today, but that meeting is not expected to produce a sizable increase in the number of daily barrels of crude produced.
The inflation worries, combined with concerns about slowing economic growth, have made for a turbulent stock market in 2022. This morning, the Labor Department reported that initial jobless claims for the week ending June 25th, came in at 231,000, which was down slightly from the previous week’s upwardly revised figure of 233,000. Later today (at 9:45 A.M. EDT), we will get the latest data on manufacturing activity in the greater Chicago area. The forecast calls for a slight decline in the index. The economic data of late, including a weak reading on consumer confidence earlier this week, have done little to quell growing sentiment on Wall Street that a recession may be looming down the road. A weak showing in the metals commodities market over the last few months often is a sign that the economy is weakening. Tomorrow, we will get the June reading on manufacturing activity from the Institute for Supply Management at 10:00 A.M. (EDT).
All this economic data come on the heels of the release of the final revision to first-quarter GDP estimate yesterday. Overall, the figure was revised lower (from -1.5% to -1.6%), but the most troubling aspect for market pundits was the sharp downward revision in consumption growth (from 3.1% to 1.8%). This adds further fuel to the fire that the U.S. consumer is starting to feel the ill effects of stubbornly higher inflation and curtailing purchases of non-essential items. The report also did not help the performance of the consumer discretionary sector, which was been under selling pressure in recent sessions and is down more than 30% to date in 2022.
The escalating worries about stagflation, a period where higher prices occur at the same time as economic growth is slowing and unemployment is rising, are playing havoc with just about every sector with the exception being the energy group. However, the oil and gas stocks are starting to look a bit overbought, especially if a recession is likely later this year or next. These factors make sector-based investing difficult, as the downturns can often be severe if one’s portfolio is too exposed to any particular group.
Given this backdrop for the market, we continue to recommend that investors focus on individual stock-picking, with an emphasis on the stocks of high-quality companies that are not looking overvalued and generate steady earnings growth and ample cash flows. These entities are best positioned to weather the negative impact from a slowing economy.
Meantime, investors should be aware that today’s session is the last one of June and the second quarter. It will conclude the worst first half for the U.S. stock market since 1970.
Quarter-end trading may add to the market’s volatility, as we are likely to get some window dressing by Wall Street firms. Window dressing is a practice of mutual fund and other portfolio managers to improve the appearance of a fund's portfolio before presenting it to clients and/or shareholders. To window dress, the portfolio manager sells stocks with large losses and purchases high-flying stocks near the end of the quarter.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
