Before The Bell
It was an uneven performance on Wall Street last week that saw the S&P 500 Index barely snap a five-week winning streak that commenced in early October. The major equity averages fell in the first half of the week on inflation concerns, prompted by hotter-than-expected readings on both producer and consumer prices, but then rallied, nearly erasing all of the losses, in the final few days of trading when Treasury market yields, though up for the week, stabilized below the 1.60% mark. This prompted some bargain hunting in the high-growth (i.e., technology) sectors that were weaker in the early part of the week. The equity futures are pointing to a continuation of that late-week buying when the U.S. stock market opens this morning.
This week, the investment community’s attention will turn to the economic news, President Biden’s virtual meeting with China’s President Xi (scheduled to take place this evening), and the release of quarterly results from a number of the retailers, including industry giants Walmart (WMT), The Home Depot (HD), Lowe’s (LOW), and Target (TGT). Last Friday, investors learned from the University of Michigan that consumer sentiment fell to its lowest level in 10 years on inflation concerns and a record number of workers quitting their jobs. That did not help what was an already laggard showing from the consumer discretionary group last week. This week’s quarterly reports—and maybe more so accompanying guidance—may provide clues as to how the retailers may fare during the all-important holiday shopping season, which may have already begun due to fears about shipping delays and supply-chain issues slowing commerce activity. A survey from MasterCard (MA) estimates that Black Friday retail sales will be up 20%, year over year.
On the business beat, the headline report also will focus on the retailing sector, with October retail sales due before tomorrow’s opening bell. That report, along with the aforementioned events, will be closely monitored for insight on how the U.S. consumer and retailers are doing in an environment where COVID-19 concerns still linger. Our sense is that it will be another good year for the online shopping sites in the coming weeks, but many shoppers who were forced to buy online last year pre-vaccinations will now be returning to the brick-and-mortar stores. Other reports this week include housing starts (Wednesday) and initial weekly unemployment claims and the leading indicators (Thursday). There are no notable reports due today and on Friday.
For much of 2021, the equity market has taken its cue from the performance of the fixed-income market, and at times the direction of bond yields has prompted some notable sector rotation. Right now there seems to be a tug of war going on for bond investors, and that is keeping yields from breaking notably in either direction. One would think that the hot pricing data and the announcement from the Federal Reserve that it will begin tapering its asset purchases this month would push yields higher, but the central bank will still be buying more than $100 billion of bonds this month and the tapering will be measured in the coming months. Too, many investors are looking at bonds in the open market as a safe-haven play against the possibility of some future profit taking in an equity market that is trading right near its all-time high. Given this dynamic, it may be prudent for investors to not to go all in on one investment theme, and keep a healthy balance of high-growth and value-oriented cyclical stocks in their portfolios.
With the major averages sitting just off of their all-time highs, and still some uncertainty in the market (especially with regard to how aggressively the central bank may or not act on the monetary policy tightening front) and the hot inflation data, investors are starting to look more at safe-haven instruments and inflation-protection vehicles. The value of the U.S. dollar continues to rise and gold had one of its better weeks in quite some time during the latest five-day stretch. Investors wanting to add some safer holdings to their portfolios, but don’t want to decrease their equity market exposure at a time when the Federal Reserve is still flooding the financial system with liquidity, may want to take a look at the stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line.
So with the Thanksgiving holiday right around the corner and the start of the holiday season nearly at hand, will there be another so-called “Santa Claus” rally for Wall Street in a year that has already proven quite profitable for those long equities (the S&P 500 Index and the NASDAQ Composite are up roughly 25% and 23%, respectively, year to date). Our sense is that with third-quarter earnings season in the 11th hour, the news on the economy and commentary from the Federal Reserve will determine whether the major equity averages will push higher off of their already elevated perches over the next six weeks. The Federal Reserve appears to not want to rock the boat just yet by becoming more hawkish with its monetary policy. There also is the question of who will lead the central bank in the coming years, with the presumed favorites being current Chairman Jerome Powell and Federal Reserve Governor Lael Brainard.
– William G. Ferguson
At the time of this writing, the author did not have positions in any of the companies mentioned in this article.
