Any joy investors took from yesterday’s Federal Reserve policy announcement and Chairman Jerome Powell’s press evaporated on Thursday, as major indexes sank and the Dow Jones Industrial Average fell within reach of its own bear market.
Several data released today hinted at a slowing economy:
- The Philadelphia Fed manufacturing index fell to -3.3, versus +5.5 expected, indicating that manufacturing activity in the region was contracting for the first time since May 2020.
- Housing starts fell 14.4% in May to 1.549 million annualized units, the lowest level in 13 months.
- And while initial jobless claims for the week ending June 11 were unchanged at 229,000, the previous week’s number was revised up by 3,000 claims, and the four-week moving average of 218,500 was the highest in five months.
“The labor and housing markets are normalizing after being red hot in 2021,” says Bill Adams, chief economist at Comerica Bank. “Higher interest rates have broken the housing rush, with the benchmark survey of homebuilders showing reduced foot traffic at showings. Layoffs remain historically low in the US, e-commerce and temporary services in the data of the last week”.
Meanwhile, investors continue to ponder the ramifications of the Fed’s 75 basis point interest rate cut, and how effective it could be in the face of a major market headwind.
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“Maybe [the rate cut] it enhances the Fed’s credibility, but it remains to be seen whether monetary policy is a sufficient tool to materially impact inflation that is being driven primarily by supply-side constraints,” says Shawn Snyder, chief investment strategist at Citi. Personal Wealth Management.
Every sector of the market was lower on Thursday, although some had it worse than others. energy stocks (-5.5%) were the market’s worst performers despite a 2.0% improvement in US crude oil futures to $117.58 a barrel. Tech and technology stocks continued to bear the brunt of higher rate fears; Tesla (TSLA, -8.5%), advanced micro devices (AMD, -8.1%) and communications letter (CHTR, -7.5%) were among some of the most notable declines.
Consumer staples (-0.8%) offered the best defense, in relative terms, thanks to modest gains in the size of walmart (MMR, +1.0%) and Procter & Gamble (PG, +0.6%).
Major indices suffered significant damage. the Nasdaq Composite (-4.1% to 10,646) led the way lower, followed by the S&P 500 (-3.3% to 3,666) and the Dow Jones (-2.4% to 29,927). The industrial average is now just a 2.2% decline away from being 20% below its Jan. 3 closing high and entering its own bear market.
Other news in the stock market today:
- the small cap Russell 2000 it fell 4.7% to 1,649.
- gold futures it gained 1.7% to finish at $1,849.90 an ounce.
- bitcoins the decline continued, with the cryptocurrency falling 3.9% to $20,841.49. (Bitcoin operates 24 hours a day; prices reported here are as of 4pm)
- Fears of a possible recession dragged down a number of travel stocks today. cruise operators Carnival (LCC, -11.1%) and royal caribbean (RCL, -11.4%) were among the biggest decliners, while airlines american airlines (ALA, -8.6%) and delta airlines (DAL, -7.5%) also plummeted.
- Kroger (KR) shares fell 2.1% after the supermarket chain reported earnings. In its first quarter, KR posted adjusted earnings of $1.45 per share and revenue of $44.6 billion, more than the $1.30 per share and $44.2 billion expected by analysts. Kroger expects full-year earnings to come in at between $3.85 and $3.95 per share, a slight improvement (10 cents) on the low end of its previous forecast. CFRA Research analyst Arun Sundaram maintained a Sell rating on KR shares. “Gross margin headwinds could strengthen with increases in price competition and continued inflationary pressures,” the analyst says. “Lower fuel margins, less profit from the COVID-19 vaccine, and moderating demand for food at home will also likely be headwinds this year. Overall, we think it’s a good time for investors to take profits considering that KR shares have outperformed their peers and the broader market to date.”
More energy in energy?
Oil and gas stocks may have had a miserable day, but don’t assume they’ve run out of fuel, either.
“We believe that energy prices will remain elevated for the foreseeable future, as the demand for fossil fuels is not declining as fast as people think and alternative energy is not as readily available as people think,” says David Trainer, CEO of investment research firm New Constructs. “Earnings in the energy sector are rising much faster than the overall valuation of the sector, so there remains a lot of upside across the sector.”
But given the still massive run in energy in 2022 (+41.6% YTD), investors have no leeway to buy the sector indiscriminately, unlike earlier in the year.
“Investors need to do their homework in this environment and focus on the most profitable companies trading at the deepest discounts regardless of sector,” he says.
Investors who want to try and squeeze some more juice out of the oil patch can start their search with our top seven energy picks for the rest of the year. Each of these stocks earns high marks from the analyst community, and we highlight what sets them apart from the rest.