This morning, the news on the economy was rather light and will remain that way for the rest of this week. The report of note came from the Labor Department, which showed that initial jobless claims for the week ending August 12th totaled 239,000. That figure was down 9,000 from the previous week’s tally and still running at a level indicative of a tight labor market. We also learned that manufacturing activity in the greater Philadelphia area came in at 12, much better than the forecast of -10 and the first positive reading in 12 months. These data would give the Federal Reserve no reason to pause on the monetary policy tightening front.
Turning to the corporate world, the headline reports came from two Dow-30 components. This morning, mass merchandiser Walmart (WMT) reported July-quarter earnings per share of $1.84, on a revenue advance of 5.7%. Walmart exceeded expectations on both the top and bottom lines, powered by a 6.7% same-store sales advance. The company is benefiting from consumers, who have seen their purchasing power compromised by elevated inflation, trading down to lower-priced products. Shares of Walmart recently turned lower in extended hours trading. Yesterday afternoon, Cisco Systems (CSCO) reported adjusted fiscal fourth-quarter (ended July 29th) earnings per share of $1.14, topping the consensus estimate of $1.06, while revenue of $15.20 billion was better than the Street’s forecast of $15.05 billion. The tech giant's October-quarter earnings forecast also was better than Wall Street anticipated. Cisco Systems stock is higher in pre-market action.
In general, there has been a notable pickup in equity market volatility over the last fortnight of trading. This should not come as a big surprise, as stock market valuations were looking stretched heading into a period that has historically not been kind to equities. Indeed, August and September have been two of the weakest months for stocks, tracing all the way back to the years following World War II. With earnings season now almost in the record books, investors will be turning much of their attention to the Federal Reserve and its battle to tame inflation.
On point, we received the minutes from the July Federal Open Market Committee (FOMC) meeting yesterday (released at 2:00 P.M. EDT). The readout showed a hawkish stance among Federal Reserve monetary policymakers. The central bank noted upside risks to inflation that could require additional monetary tightening. Fed leaders also said that disinflation in core prices, which exclude the more volatile food and energy components, was still not significant enough for the Fed to think its job of promoting stable prices is close to complete. Lastly, the minutes indicated that the central bank believes that more below-trend growth is needed to bring supply and demand into better balance and ultimately push prices lower.
The market, which is still expecting the Federal Reserve to cut interest rates by mid-2024, is not sold that the central bank will keep the federal funds rate elevated through the entirety of next year. However, stocks sold off yesterday afternoon on the possibility of a few more rate hikes on the table. The futures are indicating a modest rally to start today’s session, but the market’s ability to hold those gains has to be in question, given the recent bearish sentiment on Wall Street.
The mixed July inflation data, and signs that the Federal Reserve may remain more restrictive on the monetary policy front than market pundits originally expected, has pushed Treasury yields higher and pressured equities, particularly those of the higher-growth companies. A disappointing quarterly report from tech behemoth Apple (AAPL) earlier this month did not help the recent plight of the tech sector.
The attention of Wall Street will soon turn to the Federal Reserve’s annual conference in Jackson Hole, Wyoming, which will commence on August 24th. At that get together, several Fed officials, including Chairman Jerome Powell, are slated to speak. Market pundits will be looking to gather more clues about what the Federal Reserve’s next monetary policy move will be. This event has the potential to drive trading over the second half of next week.
Investors also have been roiled by some non-Fed news in recent weeks. Reports showing weak growth in China and renewed concerns about the near-term health of U.S. regional banks, the latter prompted by recent credit ratings downgrades for a number of those lenders, are pressuring stocks. There are worries that if the central bank stays increasingly restrictive for a long stretch, it may exacerbate some of the operating problems for the regional banks, insurance companies and the commercial real estate companies.
So what is an investor to do in this uncertain environment? We continue to recommend focusing on stocks of high-quality companies. We think these companies offer a combination of downside protection and upside gains. These entities are likely to perform better in uncertain economic times, but also could deliver gains if the Fed is able to orchestrate a “soft landing” for the economy as it winds down its most restrictive monetary policy course in four decades. The stocks of these companies are typically ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line®, and can be easily identified using Value Line’s stock screening capabilities. Overall, there seems to be a steady movement away from the higher-growth, but often less profitable companies (i.e., technology) and into the value-oriented sectors. - 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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