This morning, the attention of Wall Street is locked on the latest reading on inflation. At 8:30 A.M. (EDT), the Labor Department reported that the Consumer Price Index rose 0.2% in July. When backing out the more-volatile food and energy components, the core-CPI was also up 0.2% last month. On a 12-month basis, the CPI and the core-CPI were up 3.2% and 4.7%, respectively. All in all, the report came in as expected, and showed some easing in price growth last month. This was a headline report for the Federal Reserve, as it will be used, along with tomorrow’s companion report on producer (wholesale) prices, in formulating future monetary policy. Investors should note that the Fed will receive several more inflation data points before it commences the next Federal Open Market Committee (FOMC) meeting on September 19th. Treasury Market yields, which have climbed over the last fortnight, are heading lower on the CPI report. The equity futures, which were bullish leading into the inflation reading, are gyrating a bit, but still indicating a higher opening when trading kicks off stateside.
The inflation figures were not the only data the Fed was watching this morning. The Labor Department also reported that initial jobless claims for the week ending August 5th totaled 248,000, which was much higher than the consensus expectation of 230,000. The central bank is hoping to slow job growth and ultimately ease the ongoing inflationary pressures in the labor market, which are being driven by the steady increase in the average hourly wage of the American worker. Today’s report may signal a step in that direction. The market expectations for interest-rate hikes at the remaining three FOMC meeting of 2023 all came down on this morning’s economic reports.
Second-quarter earnings season also remains on the radar of Wall Street. Since the close of trading yesterday, there were a few headline quarterly releases, including the latest results from entertainment giant Walt Disney (DIS). The Dow-30 component beat bottom-line forecasts, but fell short of expectations on the top line. The revenue miss was accompanied by a shrinkage in Disney+ streaming accounts. The company also announced a price hike on its advertising-free streaming option and warned of a crackdown on password sharing. Shares of Disney, which have been market laggards for an extended stretch, are rallying modestly in pre-market action. Conversely, shares of fellow theme park operator Six Flags (SIX) are looking at a lower start after the company reported disappointing quarterly results. The stock of Novo Nordisk (NVO), which announced some promising weight-loss drug news earlier this week, is pointing to a lower start today after the obesity drug producer beat second-quarter earnings forecasts, but cut its full-year 2023 sales outlook. Lastly, shares of China-based Alibaba (BABA) are higher after the technology company beat forecasts for both revenues and earnings per share.
Overall, the earnings results have been better than feared, and that has provided some recent support for stocks. However, as we will touch on in greater detail below, when a company disappoints with its quarterly release, the stock is not spared the wrath of Wall Street, which was seen last week when technology behemoth Apple (AAPL) reported lighter-than-expected revenue and earnings figures. On the merger-and-acquisition front, we learned this morning that Tapestry (TPR) is acquiring fellow apparel producer Capri Holdings (CPRI) for $57 a share. Shares of Capri are up more than 55% in extended hours trading on the deal news.
In recent weeks, the equity market has seen a pickup in volatility on both an intra-day and daily basis. Yesterday, the major averages weakened notably into the closing bell ahead of today’s inflation data. Also adding to Wall Street’s recent skittishness are renewed worries about the health of the U.S. regional banks, a ratings downgrade for U.S.-issued debt from Fitch & Co., and slowing growth in China, the world’s second-largest economy. The investment community is also uncertain about what the Federal Reserve’s next monetary policy move will be and that has created some anxiety among equity and bond market participants, especially with equity valuations looking quite stretched at the moment.
In general, the frothy market valuation had investors searching for some value names in recent weeks, and that has brought renewed interest in the cyclical sectors. The higher lending rates, which can be detrimental to the performance of the higher-growth, but less-profitable, technology names, and sentiment that the Fed will orchestrate a “soft landing” for the U.S. economy as it winds down its monetary policy tightening cycle, has also prompted some movement out the technology stocks and into the value-oriented equities. That said…
We continue to recommend that investors spend less time focusing on a specific sector and instead target the individual stocks of high-quality companies that have demonstrated a long history of delivering steady earnings and cash-flow growth, even when economic growth is slowing. Many of these issues are ranked 1 (Highest) and 2 (Above Average) for Safety™ by Value Line® and can be identified quickly using Value Line’s stock-screening capabilities. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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