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The roller-coaster ride on Wall Street continues. After falling for much of the week, the major stock market indexes were gaining ground early Thursday as investors digested the latest unemployment numbers. Last week’s initial jobless claims suggest the Federal Reserve’s campaign to combat inflation may finally be bearing fruit.
Investors used that positive development as an excuse to buy up their favorite beaten-down tech stocks. As of 11:59 a.m. ET, Amazon (AMZN -1.40%) had climbed by 1.5%, Nvidia (NVDA -0.98%) had jumped by 4.1%, and Snowflake (SNOW 1.16%) had rallied by 5.3%.
There was little in the way of company-specific news to explain their upward momentum, which suggests that traders’ focus was squarely on the trajectory of the overall economy.
Image source: Getty Images.
The weekly unemployment report from the Department of Labor showed that for the week ending Dec. 3, initial jobless claims climbed by 4,000 to 230,000. That result was in line with what economists had predicted. At the same time, the number of people already collecting unemployment benefits increased by 62,000, rising to 1.67 million — which marked that metric’s highest reading since February. While the overall numbers were still low by historical standards, the increases suggest that people looking for jobs are beginning to have a more difficult time finding them.
While that would normally be viewed as bad news, the Federal Reserve has been increasing benchmark interest rates in an attempt to cool the overheated economy that has been fueling high inflation.
The Fed embarked on that campaign of interest rate hikes early this year. Higher rates make borrowing more expensive, which causes consumers and businesses alike to spend less. This results in decreases in demand — and as any student of economics can tell you, falling demand generally results in lower prices. The economy is a complex mechanism, however, so the amount of time necessary to get inflation under control can vary depending on a variety of factors.
The Federal Reserve has made no bones about its intentions, saying it will continue to aggressively fight inflation until it successfully gets it in check. However, as market watchers are well aware, there’s a fine line between cooling an overheated economy and tipping it into recession. The central bank is trying to avoid a recession and instead finesse the U.S. economy to a “soft landing” — no simple feat.
A slightly cooling job market seems to suggest that rising interest rates are beginning to have their desired effect. That said, there’s a long way to go before the Fed can take a victory lap. We’re only one unfavorable economic report away from the stock market shifting back in the other direction.
The current conditions represent both challenges and opportunities for our trio of companies.
For investors with a long-term outlook, the day-to-day fluctuations of the market and individual data points regarding the overall economy should be viewed as fleeting, as they most likely won’t impact the overall success or failure of these businesses. Amazon and Nvidia are both leaders in their respective industries, and Snowflake has made remarkable strides in its two years as a public company. Furthermore, durable businesses tend to survive periods of economic volatility and emerge from them even stronger.
For optimistic investors, buying opportunities abound. These stocks are selling at significant discounts to their prices of just one year ago. Amazon is the only clear bargain among the three, trading at just 1.6 times next year’s forecast sales. For context, experts generally view a price-to-sales ratio of between 1 and 2 as reasonable. Snowflake and Nvidia have much more growth baked into their valuations, trading for 15 times and 14 times next year’s sales, respectively. That said, investors tend to award premium valuations to companies with strong records of growth and equally strong prospects. Nvidia and Snowflake certainly fit that description. Furthermore, their valuations are near their lowest levels in years.
For investors who plan to hold onto their shares for three to five years or more to watch their investing theses play out, buying shares of these top-shelf companies now should seem like a brilliant move.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Amazon.com, Nvidia, and Snowflake. The Motley Fool has positions in and recommends Amazon.com, Nvidia, and Snowflake. The Motley Fool has a disclosure policy.
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