The month of September, which has historically been a difficult one for equities, is off to a volatile start. The recent inflation and labor market data have created some uncertainty on Wall Street about how the Federal Reserve will navigate its near-term monetary policy course. In particular, the labor data, which included stronger-than-anticipated jobs creation in August and the lowest initial weekly jobless claims figure since late January, raised sentiment that the central bank will need to keep interest rates higher for longer to effectively fight inflation. This has pushed Treasury market yields and the value of the U.S. dollar versus a basket of international currencies higher and pressured equities, particularly those of the higher-growth, but often less profitable companies. The dollar, though, is weaker this morning on continued hopes that the Fed can ultimately orchestrate a “soft landing” for the U.S. economy, as it nears the end of its monetary policy tightening course. This, along with some news from the corporate world (see below), is pushing the equity futures higher and indicating a positive opening for the U.S. stock market.
This week, the attention of Wall Street will remain focused on the U.S. inflation situation, with the release of several key reports that will be scrutinized by the Federal Reserve ahead of the commencement of its two-day Federal Open Market Committee (FOMC) on September 19th. The August figures for consumer and producer (wholesale) prices from the Labor Department will be released on Wednesday and Thursday, respectively. The consensus is that both the Consumer and Producer Price Indexes rose last month. If this materializes, it may bring more sentiment that the Fed will maintain its increasingly restrictive policies for longer than initially predicted by Wall Street and put some more upward pressure on Treasury market yields, which have not been a good backdrop for equities over the last fortnight of trading. In addition to the pricing data, we will get the latest figures on retail sales and industrial production and capacity utilization, as well the initial September reading on consumer sentiment.
On the corporate front, there are a few companies that are on the radar of Wall Street this morning. Shares of sweet goods maker Hostess Brands (TWNK) are set to open sharply higher after reports surfaced that the company, with its iconic Twinkies, has agreed to be acquired by fellow consumer packaged foods company J.M. Smucker (SJM) for $5.6 billion, including the assumption of debt. Likewise shares of electric car maker Tesla (TSLA) are trading higher in pre-market action after a leading investment bank noted that it sees potential growth in the company’s market value due to Dojo, Tesla’s AI-powered supercomputer.
Wall Street has been worried recently that a recession, which has not yet materialized in 2023, will now occur at some point in 2024. The recent increase in the long end of the Treasury market yield curve has triggered this sentiment. The resultant upward pressure it is putting on lending rates (the rate on the 30-year fixed mortgage recently approached 7.50%) is being monitored by Wall Street, as a continuation of this trend could potentially put more stress on the residential and nonresidential markets and the U.S. banking industry. This would not be a good backdrop for loan originations, which are a key component of both consumer and business investment and ultimately economic growth.
Then there is the U.S. consumer, which has been the backbone of the recent economic expansion. The consumer is still spending at a brisk rate (personal spending rose 0.8% in July), but at what expense has this come and will the consumer be able to keep up the torrid pace? The spending has resulted in shrinking savings accounts and ballooning credit card balances. This may put some pressure on spending budgets down the road when some of the credit card bills come due. The recent rise in energy prices both here and overseas will also make it harder for individuals and families to maintain their household budgets and for businesses to run their operations. On point, the recent jump in fuel prices has had a negative impact on the stocks of industrial and transportation companies. Conversely, oil and gas stocks have gotten a boost from higher crude quotations.
So what is an investor to do, given all of the ongoing uncertainty and with stock market valuations looking frothy following the completion of second-quarter earnings season? We continue to recommend a portfolio consisting mostly of high-quality companies and cash. With price-to-earnings multiples looking quite elevated, those companies that fail to impress with their third-quarter earnings results and forecasts may be susceptible to some selling. In this environment, investors may want to look at some of the multinational companies, as the recent renewed strength of the U.S. dollar, save for today, may give a boost to the profits generated overseas when translated back into greenbacks. This could lift the profit margins of the multinationals in the near term. – William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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