This morning, stock futures are pointing to a negative opening, as investors digest the latest domestic employment data. The U.S. Bureau of Labor Statistics reported that June nonfarm payrolls increased by a solid 372,000, versus economists’ expectation of 250,000 and the revised May additions of 384,000. As anticipated, the unemployment rate held firm at 3.6%. Average hourly earnings gained a modest 0.3%, month to month, which also was not surprising. Labor force participation came in at 62.2%, compared to 62.3% in the prior month. These numbers follow Thursday’s report of modestly higher jobless claims. The labor situation remains quite good, with many more employment opportunities (11.3 million) than people available (less than 6 million) to fill those positions. In short order, the Commerce Department will release revisions to its wholesale inventory data for the month of May. The inventory growth measure will probably stay unchanged at 2.0%. Also, the May consumer credit figure will become available this afternoon. The outlook is for total credit to have amounted to $30 billion, down from the April level of $38 billion, reflecting more caution with regard to spending. Earlier this week, solid reports of factory and core capital equipment orders in May and indications of a firmer expansion in the services sector during June lent support to stock prices. For this holiday-shortened week, the major stock market indexes, led by the NASDAQ, look to post low-single-digit gains.
Share prices generally moved upward in the first three trading days of this week, with marked strength displayed on Thursday. Advancing issues outnumbered decliners 10 to 1 yesterday. Energy and consumer discretionary stocks showed renewed vigor. Only the utility sector lost ground. Machinery company Caterpillar (CAT) gained 4.6%, while Marathon Oil (MRO) improved 5.6%, footwear manufacturer Nike (NKE) rose 3.7%, and electric car maker Tesla (TSLA) increased 5.5% in share price. Equities enduring losses included employee benefits provider UnitedHealth Group (UNH), beverage producer Coca-Cola (KO), insurance firm Travelers (TRV), and electric utility Xcel Energy (XEL), down 0.2%, 0.8%, 0.2%, and 2.0%, respectively. We note that the Chicago Board Options Exchange volatility index, at 26.08, remained somewhat elevated. The 10-year Treasury bond yield ended the day at 3.007%, compared to the two-year note yield of 3.039%. This rate inversion, along with other recent similar momentary occurrences, suggests a recession is at hand.
Next week, fresh Consumer Price Index data will be released, and corporations, starting with the leading investment banks, will launch a new earnings season. The Federal Reserve will closely monitor this information prior to its July 26-27 meeting. Indications are that the Fed will hike short-term interest rates by another 0.75 of a percentage point in an effort to cool rising capital goods and services prices. The central bank seems committed to an aggressive strategy in the near term. It is not likely to back down, unless inflation shows clear signs of having peaked and the economy, along with employment, is visibly softening. So far, Wall Street analysts and company managers have not significantly reduced their 2022 earnings expectations, even with higher borrowing rates slowly filtering into the financial system. Investors appear to be expecting a V-shaped recovery in the stock market, but that is not a certainty. The Fed is still removing liquidity from the economy, and share prices could come under additional pressure. Should recessionary conditions persist, the corporate earnings outlook for 2023 may deteriorate. It’s our view, however, that a possible downturn will prove relatively mild. In the meantime, investors would do well to maintain diversity within their portfolios, with a healthy weighting of high-quality stocks.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
