This morning, we received two reports on the U.S. economy. At 8:30 A.M. (EDT), the Department of Labor reported that initial jobless claims for the week ending August 20th totaled 243,000, which was much lower than expected. This adds to the narrative that the U.S. labor market is still both tight and strong. Meantime, the Commerce Department released its first revision to the second-quarter GDP estimate, which showed a narrower retreat of -0.6% (from -0.9%). However, the price index for gross domestic purchases jumped 8.4% in the second quarter, the largest increase since 1981.
In most economics textbooks, two consecutive quarters of GDP contraction would technically signify a recession. However, many experts now feel that the recent solid jobs creation, retail sales, and consumer spending figures contradict that simplistic assumption. Their belief is underscored by the observation that first- and second-quarter GDP figures were hurt by the impact of the spread of the COVID-19 Omicron variant at the turn of the calendar and the fact that buildups of inventory were pulled forward (into the fourth quarter of 2021), as manufacturers worried about supply-chain disruptions. GDP measures economic output, not demand; accordingly inventory accumulation in late 2021 added to fourth-quarter GDP growth, retarding early 2022 GDP but not reflecting a downturn in consumer spending nor in hiring. The equity futures, which were positive heading into the economic releases, are indicating a modestly higher opening to the trading day stateside.
In a week that has been relatively light on economic and earnings news, the major equity averages, which sold off to start the week, have traded in a tight band the last two sessions. The gains were modest across the board yesterday. Our sense is that investors are reluctant to make any major moves in either direction ahead of the annual Federal Reserve meeting in Jackson Hole, Wyoming, which commences today. The get-together is expected to bring monetary policy remarks from Federal Reserve Chairman Jerome Powell and some other Federal Open Market Committee (FOMC) voting members.
Over the next few days, investors are hoping to glean some more insight about how aggressive the central bank will be with regard to monetary policy at its late-September FOMC meeting. Right now the investment community is roughly split on the possibility of a half-point or three-quarter-point hike to the benchmark short-term interest rate. Whether Chairman Powell strikes a more hawkish or dovish stance on monetary policy is likely to be the driving force behind trading during the next few sessions. Investors also may want to pay close attention to tomorrow’s report on July personal income and spending. That release will include the latest Personal Consumption Expenditures (PCE) reading, which is the Fed’s most closely watched indicator of inflation.
On the earnings front, the remaining quarterly reports from the retailing sector will be trickling in over the next week. However, we did get one major report after yesterday’s closing bell, from Salesforce (CRM). The Dow-30 component posted a better-than-expected profit of $1.19 per share, on a top-line gain of 22%. However, the shares are sharply lower in pre-market trading after the enterprise software outfit trimmed its full-year revenue forecast, citing headwinds from a surging U.S. dollar and increased competition.
In all, the majority of second-quarter results have exceeded lowered expectations and that helped fuel the market’s rally from its most recent nadir on June 16th. Investors, though, should note that many companies, like the aforementioned Salesforce, have lowered their second-half operating expectations and that fact, along with the continued inversion of the Treasury market yield curve, has added to the narrative that the U.S. economy is slowing and may possibly be headed into a recession. The Federal Reserve’s aggressive tightening of the monetary reins is being felt in the housing sector, where higher borrowing costs are pushing buyers out of the market. This week, we learned that both new and pending home sales tumbled last month, which did not surprise Wall Street.
With the possibility of a recession looming later this year or in early 2023, we continue to recommend that investors focus on the stocks of high-quality companies that have the financial might to weather an economic downturn, while maintaining their dividend payouts. Some of the blue-chip technology names may be a nice option, as they are financially sound and offer the potential for growth even in a slowing economy, which cannot be said about some of the larger-cap value-oriented companies that are cyclical in nature.
– William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
