Stock futures suggest another positive performance for the major market indexes today.
During the first two days of this week, stocks traded within a relatively narrow range. On Monday, the Institute for Supply Management (ISM) reported a better-than-expected reading on its U.S. manufacturing index for July, albeit slightly below that of the prior month; S&P Global’s own index showed a similar trend. Both indexes indicate that production is expanding. Conversely, measures of construction spending pointed to a contraction in May. Domestic job openings data for June, released on Tuesday, declined modestly, but remained at levels significantly above the number of people looking for work. Share prices received a visible boost on Wednesday, when investors cheered improved readings from the ISM as well as Standard & Poor’s (S&P) on expansion in the services sector last month. A nice gain in June factory orders lent support to stock valuations, as well. This morning, the U.S. Department of Labor announced that initial jobless claims for the week ending July 30th totaled 260,000, up a bit from the prior week, as was generally expected.
In Wednesday’s trading, all sectors, excluding energy, posted share-price gains. Overall, advancing stocks outnumbered decliners about two to one. A new sector rotation is coming into view. Investors appear to be shifting funds away from value and cyclical holdings toward growth issues. Among the leaders for the day were Moderna (MRNA), up a strong 16.0%; Paypal Holdings (PYPL), advancing 9.3%; computer security firm NortonLifeLock (NLOK), rising 7.9%; and Microchip Technology (MCHP), gaining 5.7%. Laggards included medical supplier STERIS plc (STE), down 9.6%; generator maker Generac Holdings (GNRC), off by 6.6%; and Diamondback Energy (FANG), declining 4.8%. Price gains were broadly based and volatility was rather subdued.
The current corporate earnings season is progressing to an end and, thus far, results have been favorable on the whole. Since mid-June, the NASDAQ has outpaced the Standard & Poor’s 500 and the Dow Jones Industrial Average, in that order. Overall, year-to-date share-price losses are slowly narrowing. It seems that Wall Street is expecting the Federal Reserve to take a somewhat less aggressive stance in its fight against inflation in the coming months and, possibly, begin to reduce short-term interest rates sometime in 2023. This view may be a bit too optimistic, given the persistence of inflation.
Lately, the Federal Reserve has pushed back on Wall Street speculation that it is about to soon start relaxing the pace of rate hikes. The central bank is taking a scheduled break from its duties this month and will resume deliberations on the economy in September. Surely, new inflation and employment data will influence the Fed’s next move. A rate increase of either 0.75 or 0.50 of a percentage point appears to be on the table. The consensus among economists is that the Fed will keep raising rates through the end of 2022. Since the Fed will probably want to gauge the impact of its efforts, smaller increases of one-quarter percentage point seem likely in the final months of the year.
Recently, the prices of key commodities (oil, gasoline, diesel, copper, food grains) have taken a step down, suggesting that inflation has peaked. A slight cooling of the labor market also might lead to some wage pressure relief for businesses. It appears that a severe recession is avoidable.
Wall Street pundits are now debating whether we are experiencing a bear market rally or the beginning of a sustained recovery. In our opinion, investors would do well to stay with high-quality equities, adding a bit more exposure to leading growth stocks, such as Apple (AAPL), Microsoft (MSFT), and Microchip Technology (MCHP).
− David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
