Considering the futures market, stocks look to open on the upside today. Prior to trading, the U.S. Bureau of Labor Statistics reported that July domestic nonfarm payrolls increased by a modest 187,000, versus economists’ outlook for a gain of 200,000 and the month-earlier step-up of 209,000. The unemployment rate slipped to 3.5%, below Wall Street’s expectation and the June level, both 3.6%. Hourly wages advanced 0.4%, on a month-to-month basis, a bit stronger than the consensus view for 0.3% and even with the previous rate of expansion. Year over year, July wages moved up 4.4%, matching last month’s 4.4% pace, and two-tenths of a percentage point bit above what was anticipated. Labor participation held steady at 62.6%. The U.S. jobs sector appears to be slowly cooling in the face of inflation and increased interest rates.
We expect the major domestic stock market indexes to generally post a flat-to-down showing for this week. Share prices essentially traded in a narrow range early in the week. Overall job openings narrowed slightly, manufacturing indexes indicated a somewhat slower business contraction, and construction spending continued to rise, albeit incrementally. Most notably, after the market close on Tuesday, Fitch Ratings downgraded U.S. debt, one notch, to AA+ from its highest rating of AAA. That led to a sharp market pullback on Wednesday. The downgrade largely reflects a contentious U.S. Congress and the potential difficulty in approving a new annual government budget for the coming fiscal year; high national debt is also a concern. Favorable employment, productivity, services sector, and factory orders data, along with better-than-expected corporate earnings figures, released on Wednesday and Thursday, helped to stabilize share prices.
In the tumult caused by Fitch, the blue-chip Dow Jones Industrial Average displayed a good degree of stability, the broader Standard & Poor’s 500 and the tech-weighted NASDAQ, less so. Indeed, investors now appear to be taking some profits from their holdings in the leading tech issues and buying value stocks, including those of well-established financial, industrial, energy, and healthcare companies; they seem to be setting some cash aside, as well. Money market accounts and government bonds, having attractive interest rates and yields, also are pulling some funds out of equities.
Next week, investors will parse new information on consumer credit, small business optimism, the U.S. trade balance, wholesale inventories, initial jobless claims and, most prominently, consumer and producer prices. A sustained positive economic trend and further easing of inflation would back Wall Street’s growing expectation that the Federal Reserve will be able to execute a soft landing for the economy; that is, avoiding a recession. The Fed has three remaining meetings this year (in September, November, and December) in which it will decide on whether to keep short-term interest rates at 5.25%-5.50% or implement additional hikes in support of its inflation-fighting effort. On Wall Street, the consensus seems to be that nothing more than one other one-quarter percentage-point increase is in store for the financial markets. The view is that the Fed wants to avoid any serious negative impact from higher rates on the economy.
At this juncture, it may be prudent for investors to trim their holdings in high-flying tech issues, which now sport fairly high price-to-earnings multiples, opting for leading value issues in cyclical industries. Placing some cash in money markets and top-quality bonds is also a good idea. We believe stocks can recover from the Fitch downgrade over time, but volatility may become elevated in the near term. – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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