Early this morning, stock futures were pointing to a negative opening. The U.S. Labor Department released strong nonfarm payroll additions of 528,000 for the month of July, which was well above the economists’ consensus of 258,000 and the revised prior-month level of 398,000. Domestic unemployment ticked down slightly to 3.5%. Labor participation declined modestly to 62.1%. Average hourly earnings expanded by a favorable 0.5%, month to month. The labor market remains healthy, with job openings substantially outnumbering people seeking work.
It’s true that the economy has contracted for two straight quarters but, given the solid employment data, many economic experts are having trouble labeling the current environment recessionary. Later today, the Federal Reserve will announce consumer credit figures for June. Estimates are that credit increased from $22 billion in May to $27 billion, as consumers, dealing with high inflation, have reduced their savings and are borrowing more.
We believe the major stock market indexes will be challenged to post gains for all of this week. Through Thursday’s close, the Dow Jones Industrial Average lost some ground and the Standard & Poor’s 500 was up marginally. Only the NASDAQ, advancing nearly three percentage points, displayed good momentum. Following decent share-price appreciation on Wednesday, the markets softened a bit yesterday. For most of the day, the advance/decline ratio hewed close to 1.00; at the close, decliners edged out advancers. The energy and consumer staples sectors displayed marked weakness. Lower oil prices have tarnished the attractiveness of energy issues and investors, seeing Fed progress on the inflation-fighting front, are turning away from value and cyclical stocks toward growth issues. On the NASDAQ, new highs tallied 71, compared to new lows of 50.
Supporting market gains on Thursday were Advanced Micro Devices (AMD), Air Products and Chemicals (APD), Moderna (MRNA), and 3M Company (MMM). Issues weighing on overall market performance included Walmart (WMT), Chevron (CVX), Occidental Petroleum (OXY), Hess Corp. (HES), and APA Corp. (APA). Volatility for the day was rather tame.
The Federal Reserve will next meet in late September to decide on a likely additional short-term interest rate hike. That hike could well be another second consecutive 0.75-of-a-percentage-point increase. We would not expect anything below a one-half-point hike. The central bank’s efforts seem to be producing results. The housing market has lost some momentum, employment pressures have eased a bit, and certain commodities prices (e.g., oil, gasoline, copper) have stepped down. Many on Wall Street anticipate that the Fed will reduce the magnitude of rate hikes to one-quarter of a percentage point in the final three months of 2022 to get a clear read on the economic impact of its strategy. A fair population of investors seem to think that rate cuts could materialize in 2023. That may be too optimistic.
Growth equities have led the recovery off of the mid-June lows. This is not all that surprising, considering the drubbing they received earlier in the year. Investors should maintain a good measure of diversity in their portfolios, with an ample weighting of high-quality leaders in the sectors with the best recent performance.
– David Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
