Before The Bell
The month of August, which has historically been a challenging 31-day stretch for investors’ long equities, especially over the last decade, has actually been anything but, so far this year. The first two trading weeks went to the bulls, with the major equity indexes either at or near record highs. A confluence of factors, including a better-than-expected second-quarter earnings season, improving economic data, a recent drop in coronavirus cases in hot spots, including Texas and California, vaccine hopes, and a highly accommodative monetary policies from the Federal Reserve, is driving stocks higher both here and overseas. Investors are clearly taking on more risks these days, as funds are moved out of fixed-income securities and into equities.
On Friday, the major averages turned in a ho-hum performance. At the end of the session, the Dow Jones Industrial Average was up 34 points, while the tech-heavy NASDAQ Composite shed 23 points. The broader S&P 500 Index was relatively unchanged, off less than one point. Our sense is that investors took a bit of a breather after turning in winning performances in eight of the last 10 trading sessions. There was an absence of major catalysts for Wall Street on Friday morning, as the second-quarter earnings reporting season neared a conclusion.
So with earnings season now basically in the record books, what is going to grab the attention of the investment community? The first option may be the business beat, where we will get a few important reports this week, including the latest data on housing starts and building permits (tomorrow), existing home sales (Friday), and initial weekly jobless claims. The latter release has been a hot-button topic for market watchers and has often driven stocks in the sessions immediately following the release on Thursday morning. Subscribers may want to keep close tabs on the homebuilding stocks as their performances will likely be influenced by the aforementioned homebuilding and housing data. The homebuilding stocks have been on a roll since their nadir earlier this year on COVID-19 health concerns and the subsequent shelter-in-place and social-distancing measures.
The Federal Reserve also will be on the minds of traders this week. On Wednesday afternoon (at 2:00 P.M. EDT), the minutes from the latest FOMC meeting will be release, and the expectation is that it will show that the central bank remains wedded to highly accommodative monetary policies. This should not be overlooked, as the Fed’s extraordinary measures have been the prime reason behind the stock market’s massive rebound from its late-March selloff. Quite frankly, despite some lingering concerns about the U.S. economy and worries about the ongoing COVID-19 pandemic, the lead bank’s recent maneuvers, which have driven yields on fixed-income instruments to historic lows, are giving investors few viable investment alternatives to stocks. The lower yields, though, have not been good for the banking stocks, as Wall Street believes that the earning power of these financial institutions will suffer in such an environment. In addition to the financial stocks, the travel, leisure, recreation, and gaming stocks have been punished by the COVID-19 worries.
Before the open, the equity futures are pointing to a higher start for the U.S. stock market. So far overseas, the tidings have been mostly positive, with the main indexes in China finishing higher overnight, while the major European bourses are comfortably in positive territory as trading moves into the second half of the session on the Continent. Right now the aged old adage, “don’t fight the tape” appears to be front-and-center on Wall Street, with the major averages continuing to press forward as we enter the dog days of summer. Near term, with earnings season mostly in the rearview mirror, save for some news from the retail space, the bulls will likely need something to emerge to give the market a boost off of these already lofty levels. Perhaps, talk of a coronavirus vaccine will fill the void. That said, the market is starting to look priced for perfection and with valuations now quite frothy, any disquieting news has the potential to upset the applecart. In this environment, we think investors would be wise to keep an eye on stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line, as these equities may ultimately provide some downside protection if the recent bull run proves unsustainable in the coming weeks and months. Stay tuned.
– William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
