Stock futures are looking positive this morning. This is a welcome sign, following the disappointing market performance on Wednesday, when the latest Consumer Price Index (CPI) data were released. The CPI for June showed that inflation continued to accelerate. Early today, advance retail sales, also for June, came in 1.0% ahead those of the prior month, above economists’ expectations for 0.9% growth and better than May’s revised 0.1% month-to-month contraction. Stripping out vehicle sales, the monthly retail business expansion improved to 1.0%, compared to 0.6% last month. Imminently, June capacity utilization and industrial production figures will be reported. The outlook is for moderate capacity utilization of 80.5%, down slightly from the month-earlier level of 80.8%, and production expansion of 0.1%, consistent with the previous month’s rate. A little later this morning, investors will review readings on May manufacturing & trade inventories and sales, as well as the University of Michigan’s most current gauge of consumer sentiment, which probably remained near the historically low mark of 50.0. Potential share-price gains today, could erase a good portion of the losses suffered earlier this week.
The major stock market indexes began Thursday on a sour note, initially posting sharp losses. As the day progressed, with investors evaluating the recent elevated figures for consumer and producer price inflation, and data indicating a relatively limited number of domestic jobless claims, stocks recovered, albeit haltingly. Notwithstanding the higher-than-expected inflation numbers, there are signs that prices for goods and services are throttling back. Most prominently, the prices of aluminum, copper, oil, natural gas, gasoline, and food stuffs are easing from recent highs. On a negative note, the cost of housing, particularly rent, is stubbornly moving upward, supporting a strong rate of inflation. We would not be surprised to see the Federal Reserve increase short-term interest rates another 0.75 of a percentage point at its July 26-27 meeting; some on Wall Street are calling for a more aggressive one-point hike. In Thursday’s trading, only the technology, consumer staples, and utility sectors posted gains. Financial stocks were a notable drag. Top investment banks reported soft operating results for the June quarter. Shares of JPMorgan Chase (JPM), Goldman Sachs (GS), Morgan Stanley (MS), Travelers (TRV), and American Express (AXP) declined. Supporting the overall market were the stocks of Qualcomm, (QCOM), NXP Semiconductors (NXPI), Analog Devices (ADI), and Apple (AAPL).
The Fed’s rate hikes are filtering into the economy and their impact, along with high material and labor costs, will probably become more visible in the follow-on June-quarter corporate earnings reports. Wall Street analysts and company leaders are pulling down their earnings estimates for 2022 and 2023. Fortunately, price increases implemented earlier this year, despite some sales volume impact, will provide an offset. Consumers are not in a good mood, and it seems that a recession is close at hand. In the months ahead, assuming a favorable inflation trend emerges, their sentiment might well improve. Solid consumer and corporate finances suggest that any downturn would be fairly mild. We note that the overall sentiment among individual investors also has trended negative in recent times. For the second half of 2022, we expect stock market volatility to be above average, as is typical after such a first-half drubbing. The market may not yet have hit a bottom, but we are closer now than we were a few months ago. An incremental approach in recommitting to the market, leaning on high-quality issues, seems most appropriate right now.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
