This morning, the big news came from overseas, with the European Central Bank (ECB) leaving interest rates unchanged. However, the ECB did say it will end its long stretch of quantitative easing on July 1st, with plans to raise its key interest rates by a quarter-percentage point at its July meeting. It also said that inflation on the Continent continues to surge. The equity futures, which were nicely higher heading into the ECB interest-rate decision and statement, quickly reversed course on the report, which added to the global inflation worries, and we are now looking at an overall weaker start to the trading day stateside.
The one report of note on the U.S. economy today came at 8:30 A.M. (EDT) when we learned from the Labor Department that initial weekly jobless claims for the week ending June 4th totaled 229,000, an increase of 27,000 from the previous week, the highest level since mid-January.
In a week light on both economic and earnings news stateside, Wall Street is continuing to focus on the inflation situation and the role the Federal Reserve is playing in trying to slow demand and rein in prices. This has produced a choppy performance from the U.S. stock market so far this week. After two positive showings to start the five-day stretch, stocks sold off yesterday and we are looking at more red ink to start today’s session.
A confluence of factors pressured equities yesterday, most notably the price of oil jumping above the $120-a-barrel mark both here and abroad. West Texas Intermediate (WTI), a specific grade of crude oil and one of the main three benchmarks in oil pricing, hit $121 a barrel, as the supply/demand imbalance is being exacerbated by the ongoing turmoil in Eastern Europe. This has taken Russian oil off the market in most North Atlantic Treaty Organization (NATO) countries and, when combined with increasing demand around the global, particularly with domestic and international travel picking up, is pushing oil and gas prices notably higher around the globe.
In general, the elevated prices for energy, food, and other commodities, along with rising bond yields and borrowing costs, which are expected to climb further as the Federal Open Market Committee will likely raise the benchmark short-term interest rate in the U.S. by a half-point next week, are making it more expensive for many households and businesses to run their operations.
The inflation alarms and profit growth concerns are being sounded by a number of big corporations, including Microsoft (MSFT), Intel (INTC), and Target (TGT), with the latter again lowering its fiscal second-quarter guidance this week, citing higher operating costs. The latest quarterly results from Scott's Miracle-Gro (SMG) also were disconcerting for Wall Street, as the fertilizer company became one of the latest manufacturers to slash guidance after building more inventory than its end users were demanding. The likelihood that the stubbornly high inflation is weighing on corporate results in the current quarter and will impact near-term prognostications for many companies has many investors on edge.
Although the intra-day trading has been quite choppy the last few days, the market has still traded in a rather tight band relative to what we have seen so far in 2022. Our sense is that investors are waiting for the much anticipated report on consumer prices from the Labor Department tomorrow morning. The data will be closely monitored for clues to whether or not inflation peaked earlier this year. It also is expected to be highly scrutinized by the Federal Reserve ahead of next week’s two-day monetary policy meeting. A still very high Consumer Price Index (CPI) figure may prompt some selling, as it would add to expectations that the central bank will aggressively apply the monetary brakes in its attempt to rein in inflation. With two 50-basis-point hikes to the federal funds rate (at the June and July meetings) priced into the market, investors will be looking for signs about what the Fed may do at the September meeting.
Given the continued worries about inflation and building sentiment that the second-quarter earnings season may bring more quarterly misses and outlook downgrades than investors have been accustomed to in recent years, we think this may be a good time to exercise a bit of caution. The recent equity market rally, notwithstanding yesterday’s selling, has given investors an opportunity to reposition their portfolios ahead of what could be future volatile trading stretches, as Wall Street reacts to the second-quarter earnings season. We continue to recommend a portfolio of high-quality companies with solid earnings growth and strong balance sheets and keeping a healthy position of cash on hand. The latter also would allow investors to react if they believe a specific stock or sector is looking oversold. We have seen such a strategy put to work over the last fortnight, as some beaten down large-cap technology stocks fell to a price that brought the bargain hunters in, especially those with a longer-term investment horizon.
The hottest sector on Wall Street this year is the energy group, with shares of oil giant Exxon Mobil (XOM) hitting an all-time high yesterday on surging crude oil prices. With investors clearly worried about the coming inflation news, they are looking at some of the cyclical, inflation-trade areas. That said, we would not put all the eggs in one basket and continue to maintain a diversified portfolio. If the Federal Reserve missteps and applies the monetary brakes too hard and we eventually head into a recession and not a soft landing for the economy, some of the high-growth technology stocks with strong long-term growth potential may again look more appealing.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
