What happened
The unrelenting volatility on Wall Street continues. After falling for much of the week, the market stock market indexes were all gaining ground early Thursday.
The gains came as investors pored over the latest unemployment figures. The data suggests that the Federal Reserve Bank's campaign of rising interest rates -- designed to combat inflation -- may finally be having the desired effect.
The news acted as a catalyst for investors to buy up their favorite beaten-down tech stocks, as Amazon (AMZN -1.65%) climbed 2.1%, Alphabet (GOOGL -1.97%) (GOOG -1.96%) jumped 2.4%, and Apple (AAPL 0.52%) rallied 2.8% as of 11:26 a.m. ET.
Image source: Getty Images.
There was very little in the way of company-specific news to explain investor enthusiasm, which suggests market watchers were contemplating what this latest data means for the state of the economy.
So what
The unemployment weekly claims report, courtesy of the U.S. Department of Labor, revealed that initial jobless claims rose by 9,000 to 225,000 for the week ending Dec. 24, which was in line with economists' forecasts. Continuing claims, or the number of people already collecting unemployment benefits, increased by 41,000, rising to 1.71 million.
This marks the highest reading since February. While the figures are still low when measured by historical standards, the increases suggest that job seekers are having greater difficulty finding employment, as the job market continues to tighten.
Increasing unemployment would normally be seen as bad news -- but the times we live in are anything but normal. Inflation has been running near 40-year highs, and the Fed has been raising interest rates as a countermeasure to slow the overheated economy.
The theory behind the Fed's moves is this: When the economy grows too rapidly, everything from gas to housing to groceries becomes more expensive, putting pressure on consumers. The Fed increases interest rates, which in turn makes borrowing more expensive, causing businesses and consumers to spend less. The decreasing demand eventually results in falling prices. Unfortunately, there is no exact timetable on how long it could take to get rampant inflation under control.
The central bank has been clear regarding its priorities, saying it will aggressively fight inflation by continuing to raise interest rates. That said, as the Fed is well aware, if it slows growth too quickly, it risks tipping the economy into a recession -- something it's also trying to prevent.
Now what
The slowing in the job market is just one data point, but it seems to suggest that the Fed's campaign of increasing interest rates may be having the desired effect. A tightening job market is evidence of slowing economic growth, which will eventually bring down inflation.
It's too early to break out the champagne, however, because one negative economic report could easily turn the tide. In addition, the current economic headwinds still represent challenges for our trio of companies:
- Businesses have historically reined in spending when faced with an uncertain economy in an effort to shore up financial reserves. Advertising is one of the first areas to experience cuts, as marketing is something that's easy to slow down and ramp up. This places particular hardships on adtech companies -- including Alphabet -- which gets the vast majority of its revenue from digital advertising.
- It's been a brutal year for e-commerce, as the industry faces tough comps and slowing growth when compared to the lockdown-induced surges during the early stages of the pandemic. As the world's largest digital retailer, Amazon has been hit particularly hard, but e-commerce growth may finally be on the upswing.
- The one-two punch of high inflation and rising interest rates is weighing on consumer purchasing decisions. This is causing some Apple users to forego upgrading to the latest iPhone -- at least until the economy is on better footing.
There was one bit of good news that could be contributing to Apple's gains: iPhone production in China, which has been hampered by the latest COVID outbreak, may finally be catching up with demand, according to a report in The Wall Street Journal. Apple's high-end models, including the iPhone 14 Pro and Pro Max, were in short supply over the important holiday shopping season, so strong production would be a step in the right direction.
As painful as it is to see stock prices down significantly, the bright side is that investors get great deals on all three of our industry-leading companies, which have declined between 28% and 51% over the past year.
Data by YCharts
Amazon is the most obvious bargain among our trio, selling for just 1.5 times next year's sales. For context, a reasonable price-to-sales ratio is between 1 and 2. Apple and Alphabet still have a degree of growth baked into their valuations, selling for 5 times and 4 times next year's sales, respectively.
I would argue, however, that a strong history of growth and ongoing opportunities make them deserving of a premium. Furthermore, valuations for each of these companies are lower than they've been in years.
For investors with patience and the intent to hold for three to five years, these valuations represent a clear buying opportunity.
