Before The Bell
This abbreviated trading week (the market is closed tomorrow for Christmas) has been a microcosm of the trading we have seen since late last month when the new form of COVID-19, the Omicron variant, surfaced stateside. The market sold off sharply on Monday when data showed a sizable spike in new COVID-19 cases, particularly in the Northeast, only to quickly retrace those losses and then some, with two bullish sessions. The Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite rose 261, 47, and 181 points, respectively, yesterday on a day that saw advancing issues outnumber decliners by more than a three-to-one ratio, with the buying picking up into the closing bell.
The equity futures are pointing to further buying, but have pulled back some from their earlier highs following the release of a number of economic reports this morning (more below). Some positive signs in the fight against the COVID-19 virus, including updates on a number of the current vaccines and data showing fewer long-term hospitalizations and deaths from the Omicron strain of the virus, and encouraging data on the economy, are fueling the rally on Wall Street. Also a positive, we learned yesterday that the Consumer Confidence Index rose to 115.8, surpassing the consensus estimate of 111.0 and marking the best reading since July, which was before the coronavirus Delta variant began to worry consumers. In general, the recent reports on the economy have provided some support for the U.S. equity market and eased, to a degree, concerns that Omicron will lead to a sharp reduction in global output in the months ahead, which has weighed on the energy market and the oil and gas equities over the last fortnight.
This morning, we received a heavy slate of economic news. Initial weekly unemployment claims for the week ending December 18th remained at a low level, coming in at 205,000. The personal income and spending data, though, were uninspiring, with income up 0.4%, matching the expectation, while spending advances fell from 1.4% last month to 0.6%, likely reflecting some early buying by holiday shoppers due to worries about supply-chain issues. A closer look showed that most of the income and spending gains were the result of inflation. And on point the PCE (Personal Consumption Expenditures) deflator, which measures inflation, was up 0.6%, the hottest reading since 2008. Likewise, the core PCE figure, which excludes the volatile food and energy components, was up 0.5%, the biggest increase since 2001. Meantime, durable goods orders jump 2.5%, far surpassing the consensus expectation calling for a 1.5% increase. Later this morning, we will get data on new home sales for the month of November. Yesterday, November existing home sales came in short of Wall Street’s expectations, but the shares of the publicly traded homebuilders rose as the report showed that the nationwide inventory of available existing homes was running well below the historical norm, auguring a likely step-up in building and in future sales volume.
The name of the game being played in the U.S. equity market right now is volatility. This has been exhibited in a seemingly daily game of tug-of-war between the market bulls and bears. Daily and sometimes intra-day moves by the major equity averages have often been swift and quite pronounced for the whole month of December thus far. The coronavirus situation and commentary from the Federal Reserve that it plans to cut back on its monetary support in an attempt to tame the elevated inflation, have created uncertainty for investors and hence the pick-up in daily market volatility. On point, the broader S&P 500 Index since Thanksgiving has only produced one session where the index has moved less than 1% in either direction. Yet all in all, stocks have remained the place to be for investors, with the Dow 30 and S&P 500 Index entering today up 3.7% and 2.8% month to date, respectively.
For much of 2021, the main question on Wall Street has been whether to own the value or growth stocks, and that sentiment was primarily driven by fixed-income yields. When such bond yields rose, value stocks were often favored over the growth names, but when yields fell, the high-growth (especially technology) issues would tend to do well. This trend was nonexistent in the last week, with a drop in the yield on the benchmark 10-year Treasury note not giving a boost to the technology equities, which sold off even as the yield fell below 1.50%. If there is one thing we can take away from this performance, it’s that investors’ buying decisions should not be strictly based on the value-versus-growth debate. Our sense is that with the Federal Reserve determined to remove some of the monetary support (i.e., easy money) from the market, stock selection in 2022 will be driven by earnings growth potential and results from Corporate America. Thus, we think investors should start to focus on the stocks of companies with strong earnings growth potential that generate ample cash flows. They appear best positioned to produced gains in a market where fundamentals may now be looked at more closely, especially with less liquidity in the financial system.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
