Stocks closed lower Tuesday as investors look ahead to Wednesday's CPI report, and pressure in the semiconductor sector weighs on the tech-heavy Nasdaq. June's CPI report, a key inflation number, jumped to a fresh, 40-year high, and July's report is expected to burn just as hot. Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott, joins Closing Bell to discuss today's close, how this week's CPI reading could further impact markets and the Federal Reserve's moves on interest rates, and more. 


Closing Bell

Stocks Close Lower as Investors Await July CPI Report, Chipmakers Weigh on Nasdaq

But for now I do want to turn back to the major indexes joining me now is Mark luschini, chief investment strategist at janney Montgomery scott mark, thanks so much for coming on the show. So a little bit of weakness today, ahead of that july CPI I report tomorrow. What's your take on the market action? Well, I think it is investors just kind of squaring up their open positions in advance of a number that, you know, obviously with inflation being uh, significant lagging indicator, we don't have a really good judgment as to what this number is going to come in at. And even though there's some estimates that like you had mentioned in your opening remarks, that we may see some trimming of that year of a year, reading what the Federal Reserve is really focused on and then jay Powell's unconditionally is inflation and they're marking it by way of the month over month numbers and we've seen over the last three or four months or so the month over month pace of inflation is actually accelerated somewhat. So tomorrow's estimates are for about one half of 1% increase. I think if that comes in a little bit hotter, perhaps we will put the bed the Fed pivot and realize that the Federal Reserve may sustain its pace of tightening at a more rapid pace than markets anticipate. And I think that's why investors have cooled a little bit of enthusiasm after this, you know, double digit rally off of those mid june lows. Yeah, well we are up double digits. You're right from those mid june lows. I think there's some momentum building in the stock market, investors like to see that even if it is just a relief rally, I'm curious as to your expectation for the path board for interest rates, the rest of the year mark and how that might impact the stock market. Well, again, I think the key is going to be those inflation readings because it's going to be the reaction function of the Federal Reserve to those readings that we're going to get over the next couple of months leading up to the next Fed meeting in september that will, I think be a will tell on not only what's going to happen economically, but obviously the impact on markets and uh, right now, of course we've gotten a couple of concern, quarters of negative GDP numbers, which economics one on one suggests that it's a recession. Uh, the official arbiter of recessions has hasn't come out and necessarily declared it as such. And so we're obviously though we've seen a significant down shift in economic activity right now, I think investors worries would become more heightened if in fact, we see a couple of more prints of inflow That run hot engendering a more swift response by the Federal Reserve, which could obviously thwart the expansion or at least have a more severe. I've come to the recession and take down earnings, which so far have held up pretty well for investors expectations. Yeah, I think that is a good point and I think that's why we've seen the market melt up in July July of course the best month for the stock market since 20 20. As those second quarter earnings did start to roll in, we can't look past that we know as consumer prices do remain rising at their fastest pace in 40 years. Americans simply have to dig deeper and deeper into savings just to get by mark based on what we've seen this earnings season, the forthcoming reports that will get as well. What is the position of corporate America? How is corporate America doing? And will it be able to hold up here in the quarters ahead? Well, I mean in general corporate America is in pretty good financial health. I mean corporate balance sheets are in good shape. We have an abundance of cash held by corporations, especially the large ones S and P 500 companies. And you know, so far again, the earnings picture came in better than the pessimistic expectations. And so corporate profitability remains positive even if its pace of growth is decelerating somewhat an estimate Are still for growth in 2023 over this year. So I think, you know, given all of that the companies are in pretty good position or whether any kind of inclement economic climate we may be in the midst of or facing but at the same time, though you can see by way of the sentiment surveys, they're also bracing for things perhaps to get a little bit worse before we'll see better conditions, now of course we did get a second war morning from a chip stock earlier today, mark. This time Microns saying that sales could come in worse than expected comes after warning from a video yesterday in these technology names. They make up such a large chunk of the S and P 500. Of course, they drive the performance of the NASDAQ as well. Is it concerning to you from a GDP perspective that the chip sector continues to underperform amid supply chain challenges and macro economic headwinds? Well, you raise a good point. However, obviously chips go into a lot of durable and nondurable goods, items that were bought hand over fist in the midst of the lockdowns due to the pandemic. And as a consequence, what we're seeing is a shift in consumer spending away from things that you would do remote work or at home and to services related activities such as travel, leisure and entertainment. And so you had this robust move in saying bills and profitability of these semiconductor companies that is cooling off of that exceedingly heated pace, maybe even overheated pace. So it's kind of a natural ebb and flow. I think perhaps somewhat indicative of the fact that that spending hasn't necessarily evaporated, but it's certainly slowed somewhat. And you can even see it from some of the cloud related companies in terms of business activity and on capital expenditures on software, which is still growing but has y once again decelerated from a very rapid pace in the immediate aftermath of the lockdowns and the resumption of economic activity given potential volatility ahead Mark, which I know even talking about throughout this segment, of course, a lot of that dictated by the path forward for inflation in the read that will get tomorrow. I am just curious in terms of if there are sectors that you find more attractive right now that you think might be good for investors to take a look at in other sectors that maybe investors should still shy away from? Well, I think energy remains one that has sort of idiosyncratic characteristics even though it's cyclical. And you would think it wouldn't be one that would perform well if the economy is slowing, uh, supply issues even with somewhat softer demand expected still remain exceedingly tight. And so I think that's going to keep oil prices well bid. Uh, and therefore the prospects of further profitability for energy companies looks rather attractive. So that's a sector. But we also, like some of the more defensive areas such as utilities and even consumer staples or healthcare, importantly, within healthcare biotech. These are areas that we favor over others that we would avoid, such as some of the tech related companies, particularly as you mentioned earlier, semiconductors and the more cyclical areas that have already had a significant run and are now sort of paying the price of that abundance of profitability setting up for a very difficult same store sales comparisons on a quarter, a quarter or a year over year basis. Mark, we've got to leave it there. Great to get your take on a day when the stock market has seen a little bit of volatility, both today and even yesterday, too. That's Mark Luschini, chief investment strategist at janney Montgomery scott.