The futures market points to a positive open to today’s trading. No major economic data releases are scheduled for today. Based on market momentum through Thursday’s close, it looks as if the blue-chip Dow Jones Industrial Average (DJIA) will post a gain for the week in the 2%-3% range. The broader Standard & Poor’s 500 (S&P 500) index appears on track for an advance of close to 1%, while the tech-heavy NASDAQ composite might well turn in a flat performance.
During the first three trading days of this week, the market indexes all made solid progress, but they wavered Wednesday afternoon. On Monday, investors parsed a favorable July reading from the Empire State manufacturing survey. The next day, data showed respectable improvements in U.S. retail sales (for June), business inventories (May), and home builder confidence (July), countered by declines in industrial production and capacity utilization (both for June). At mid-week, June housing starts and building permits came in below economists’ estimates and the previous-month levels.
Yesterday, jobless claims for the week ended July 15th were softer than expected and down from the week earlier. For the month of June, existing home sales markedly deteriorated, falling nearly 19%, on a year-over year basis, the Conference Board’s Leading Economic Index was off by 0.7%, and the Philadelphia manufacturing index displayed a continued contraction, on a par with that of the prior month. Investors reacted to the latest data, sending the NASDAQ and the S&P 500 lower and the DJIA marginally higher.
Year to date, the NASDAQ and S&P 500 are up some 35% and 19%, respectively, largely driven by enthusiasm surrounding generative Artificial Intelligence, which holds out the promise of greater efficiency in the technology, industrial, and many other business sectors. A select few large-capitalization technology issues, i.e., NVIDIA (NVDA), Microsoft (MSFT), Apple (AAPL), Alphabet (GOOG), Amazon.com (AMZN), Meta Platforms (META), and Tesla (TSLA), have led the composite higher. These stocks’ price advances, though, have prompted many professionals to rebalance their managed portfolios, locking in gains, while restoring targeted sector balances. The DJIA and the Russell 2000 index of small-cap stocks, lately, have been beneficiaries of this rebalancing.
June-quarter 2023 corporate earnings results are now rolling in, and that also is impacting portfolio allocations. For example, technology company profits, so far, have not been particularly exciting, but income from investment banks generally came in above Wall Street estimates. A number of analysts on the Street are suggesting that investors rotate out of large-cap tech issues and into leading stocks in the financial, healthcare, industrial, and materials sectors. They recommend diversifying into mid- and small- cap equities, as well. This is resulting in a broadening of share-price gains in the greater market.
A broadening population of advancing stocks can spark enthusiasm in the stock market, suggesting additional gains (including tech issues), at least in the short run. There’s reason for caution, however. The top tech issues have logged outsized gains. Volatile, high-risk ``meme” stocks (e.g., GameStop, ticker GME) have garnered renewed attention, suggesting that a bubble has formed. The Chicago Board Options Exchange volatility index (also known as the VIX) is at a very low level, indicating that investors are purchasing fewer put options, which act as insurance in the event of a sharp market decline. Too, given still-high inflation and rising wages, the Federal Reserve seems on course to hike short-term interest rates at its meeting next week; another possible increase later this year could pressure equities prices.
On balance, we advise investors to maintain good diversity within their portfolios, sustaining meaningful weightings of large-cap stocks, cash, and bonds. Many analysts expect a short-lived, modest market pullback before November, which we do not forecast, but such an event likely would present a good buying opportunity for those with some cash on the side. - David M. Reimer
At the time of this article’s writing, the author did not hold any 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.
