Before The Bell
Investors have been on a rollercoaster ride since the Black Friday trading session, which saw the Dow Jones Industrial Average plunge more than 900 points in a half-day, on renewed concerns about the coronavirus. Since that day, the major averages have witnessed some sharp selloffs followed by partial rallies, but overall there has been a bearish tone to trading. In addition to the renewed COVID-19 concerns stemming from the emergence of the Omicron variant stateside, investors have been unnerved by worries about inflation, the likelihood of a more hawkish monetary policy from the central bank following commentary by Federal Reserve Chairman Jerome Powell before Congress last week, and some recent uneven economic data.
On Friday, it was another session that went to the bears, who were emboldened after the release of weaker-than-expected data from Labor Department. The report showed that the nation added just 210,000 jobs in November, falling well short of the consensus expectation, which called for a nearly 575,000 increase in nonfarm payrolls. It also indicated a jump in hourly wages, which stoked the inflation concerns that have worried Wall Street for quite some time. The job news, combined with ongoing COVID-19 fears and the Federal Reserve’s changing stance on inflation and monetary policy, has unnerved investors, who are reducing their positions in riskier assets in favor of safer holdings. The Dow Jones Industrial Average, the S&P 500 Index, the technology-heavy NASDAQ, and the small-cap Russell 2000 fell 60, 39, 296, and 47 points, respectively. Unsurprisingly, the higher growth, but riskier, technology and small-cap areas were hit the hardest.
In general, there has recently been a clear-cut movement out of riskier groups, including technology and consumer discretionary issues, and into more defensive areas like utilities, consumer staples, and telecommunications. Likewise, investors are gobbling up fixed-income securities and gold, which are seen as safer plays in a more volatile equity market. In fact, the yield on the benchmark 10-yield Treasury note, which moves inversely to the price, has dropped sharply in recent sessions, falling below the 1.40% mark. The desire for bonds has pushed yields lower, despite both increasing inflationary pressures and the likelihood that the Federal Reserve may tighten the monetary reins in 2022. Federal Reserve Chairman Powell telegraphed that the central bank may aggressively begin to cut its supportive bond buying starting this month, and may be forced to raise interest rates sooner than previously expected in calendar 2022, perhaps as early as the May Federal Open Market Committee meeting. The central bank will commence its final two-day monetary meeting of 2021 next Tuesday.
So what should an investor do amid the recent spike in market volatility? Our first suggestion is not to panic and sell. Our second is to give the stocks that Value Line ranks 1 (Highest) and 2 (Above Average) for Safety a close look, as those issues have historically performed better than the broader market during turbulent times. We like the stocks of companies that have good management teams, possess high-quality balance sheets, and generate significant cash flows, as these companies are more apt to weather any near-term storms, and have the ability to support their bottom lines via the repurchase of common stock. Investors like such buybacks both because they tend to stabilize the stock price and because they raise earnings per share over time due to there being fewer shares outstanding.
Looking at the week ahead, it will be a rather quiet five-day stretch for the business beat, with the only major economic report coming on Friday in the form of the latest reading on consumer prices. That report, along with next week’s companion release from the Labor Department on producer (wholesale) prices, will be closely monitored by the Federal Reserve for more clues about inflation, which remains a hot-button topic on Wall Street. Before this Friday’s report on pricing, we will get data on the trade gap (tomorrow) and initial weekly jobless claims (Thursday). Neither of those reports, however, have the potential to drive trading like the pricing data.
Before the bell, the equity futures are presaging a mixed start for the U.S. stock market, with the Dow and S&P 500 Index up nicely in pre-market action but the NASDAQ future contracts in the red, as inflation concerns are still hurting high-growth stocks, many of which can be found in the technology sector. This is not surprising, as a light week on earnings and economic data will likely have Wall Street focused on the Federal Reserve and the inflation situation, especially with the central bank scheduled to meet next week. As noted above, investors are clearly moving toward safer holdings and away from riskier positions. On point, the price of Bitcoin, which can be traded at any time, fell 17% in 24 hours this weekend and is again in the red this morning as investors move away from asset classes deemed to be more risky.
– William G. Ferguson
At the time of this writing, the author did not have positions in any of the companies mentioned in this article.
