The major U.S. indexes got off to another negative start this week, as a solid open eroded steadily throughout Monday’s session.
Although earnings season is in full gear, the market is largely being steered by the Federal Reserve these days. No matter what favorable news Corporate America may report in the weeks ahead, nothing will override the fact that the lead bank is intent on taming inflation. It largely aims to do this by raising interest rates to tighten the money supply. Higher rates will, of course, make it increasingly costly for businesses and consumers to borrow, thereby steadily reducing demand, and thus (hopefully) inflation. The challenge is in how to do it without sending the economy into a recession. As it stands, the Fed has indicated that it is prepared to take bigger steps if necessary. This suggests it could raise the overnight rate it charges to member banks by as much as a full percentage point at its next meeting scheduled for next week. Moreover, it remains to be determined if even bolder moves might be required.
Also, rising rates present a challenge for equities in general. With all things being equal, the higher that fixed-income yields go, stocks become increasingly less attractive to investors.
Overall, it appears that the equities’ bear market is likely to continue until the lead bank signals that it is ready to take its foot off the monetary brakes. To be sure, there will be some rallies when inflation rates start to head in the right direction, but these may prove to be short-lived, depending on how the ensuing quarters unfold.
Summing up Monday’s trading activity, the Dow Jones Industrial Average, after being up more than 350 points, closed down 215, or .7%, the broader S&P 500 shed 92 points (-.8%), and the tech-focused NASDAQ lost 92 points, (-.8%). In terms of sector performance, healthcare and utility stocks took the biggest hits, falling 2.2% and 1.4% respectively. At the opposite end, utility stocks surged just under 2%.
On the economic front, this morning’s report on housing starts indicated that higher mortgage rates are having an impact on the homebuilding sector, with a construction activity in June falling to a nine-month low. The seasonally adjusted annual rate (SAAR) fell 2%, to 1.559 million units, versus consensus estimates of around 1.58 million. Meanwhile, building permits (a forward-looking indicator) were down .6%, to a seasonally adjusted annual rate of around 1.685 million units. Tomorrow, we get the June report for existing home sales, where a slight deceleration is also expected. This will be followed on Thursday with the latest figures for initial and continuing jobless claims, as well as the leading economic indicators for June.
As we approach the opening bell this morning, U.S. stock futures are indicating a solid uptick at the start of today’s trading. Elsewhere, Asian markets were mostly down overnight, while stocks in Europe are modestly in the green. Meanwhile, oil futures are down about 2%, to around $100.60 a barrel.
− Mario Ferro
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
