This morning brought two more reports on the U.S. economy in a week that has not been short on data from the business beat. However, neither of the reports are expected to have a major impact on trading. At 8:30 A.M. (EDT), the Labor Department reported that initial jobless claims for the week ending August 13th totaled 250,000, which was down 2,000 from the revised prior-week figure. Meantime, the latest reading on manufacturing activity for the greater Philadelphia area came in at +6.2%, which was a nice improvement from the prior-month negative number. Later this morning, we will receive reports on July existing home sales and the leading economic indicators, with both expected to be more closely monitored by the market. The equity futures, which were higher heading into the first round of economic news, are still indicating a modest rally stateside after the selloff yesterday.
The equity market is more like to take its cue from a number of significant reports issued yesterday. At the top of the heap was the minutes from the latest Federal Open Market Committee (FOMC) meeting. That release had an initial positive impact on trading, with the Dow Jones Industrial Average erasing an earlier session loss of more than 300 points. The investment community viewed the Fed minutes as more dovish than anticipated. On point, many voting members expressed concerns about tightening rates too much and a desire to slow the pace and scope of hikes at some point. That did not change the sentiment that the Fed will again be aggressive at the September meeting, but left the possibility on the table for a more dovish stance in 2023. The market did not hold the rally, as worries about inflation and rising yields in Europe, and concerns about slowing growth stateside, unnerved investors.
There was some notable movement into the more-defensive sectors after the recent strong equity market rally. Conversely, the technology and consumer discretionary groups were out of favor, with the latter hurt by a weak quarterly report from retailing giant Target (TGT), continued worries about inflation, and a flat reading on retail sales for the month of July. However, when delving a little deeper into the report, retail sales, excluding the volatile automotive component, were actually up nicely last month.
However, the headline retail sales miss and a very weak report on housing starts on Tuesday morning, along with concerns about inflation and a potential energy crisis later this year in Europe, have brought more talks of a recession. The worries about slowing global growth are being reflected in the performance of the U.S. Treasury market, where the yield curve remains inverted. An inverted yield curve, which occurs when yields on short-term fixed-income securities exceed those of longer duration bonds, has been a pretty reliable predictor of a forthcoming recession, and some of the recent weak economic reports add further credence to that continuing narrative on Wall Street.
Meantime, the news from the technology sector was not all bad yesterday, but investors had to wait until after the closing bell to receive the positive reports. Specifically, Dow-30 component Cisco Systems (CSCO) reported mixed quarterly results with revenue beating expectations, but earnings falling short of forecasts. However, the shares are rallying in pre-market action, as investors liked the better-than-anticipated revenue guidance and a slightly more positive company outlook overall. Likewise, shares of Synopsys (SNPS) are pointing to a higher opening after the tech company beat both top- and bottom-line expectations in the latest quarter.
In the retailing space, the earnings news was mixed. Shares of Kohl’s (KSS) are lower after the retail chain reported disappointing quarterly results, citing the negative impact of inflation on middle-income shoppers, while BJ’s Wholesale Club (BJ) stock is pointing to a higher opening after the club store chain reported record revenue and earnings and raised its near-term prognostications.
In general, the market has come a long way in a short time since its most recent low-water mark in mid-June. That said, with signs pointing to the economy slowing and the Federal Reserve likely in no rush to alter its current monetary tightening course, we think investors may want to diversify by taking some profits in the equity groups that have rallied forcefully over the last six weeks. Funds can be redeployed to sectors that have some room to catch up. We started to see such movement into more-defensive sectors during yesterday’s volatile session.
– William G. Ferguson
At the time of this article’s writing, the author owned positions in one or more of the companies mentioned.
