Before The Bell
Wall Street turns the page on January this morning, and after an uninspiring month for equities begins February with high hopes to alter its losing ways. As for January, it was the first down month since October, as early year strength dissipated down the homestretch producing a modest deficit for the span. High P/E ratios, unsettled individual-investor trading in such highly speculative issues as GameStop (GME) and AMC Entertainment (AMC), the frustratingly slow pace of COVID-19 vaccinations, and some profit missteps all contributed to the soft ending.
As for the new month, it will begin with a rash of critical economic reports. First, we will be getting data on U.S. manufacturing activity this morning at 10:00 (EST). Construction spending figures also will be issued at that time. Then, tomorrow, we will get auto sales tallies. Wednesday will bring an issuance on the non-manufacturing sector. Thursday will see surveys on productivity and weekly jobless claims. Finally, the Labor Department will chime in with its monthly release on employment and unemployment on Friday. Ahead of all this, the futures are pointing to a rebound at the start of trading today, as for the moment, at least, Wall Street appears to be shaking off worries about the speculative trading frenzy in previously depressed stocks.
The upcoming economic reports should give a clear indication of where the economy is going so far this year. The economy slowed appreciably in the fourth quarter of 2020, notching a modest 4.0% growth rate after a strong third quarter, in which a good deal of the damage inflicted in the first half of 2020 had been reversed. Our sense is that the current period could see a further diminution in GDP growth, with additional softness then seen in the second three months of 2021.
Meanwhile, the stock market has been increasingly volatile in recent weeks, with the Dow Jones Industrial Average shedding more than 600 points this past Wednesday and again on Friday, with a 300-point uptick in between. The VIX or “fear index” is up significantly. In truth, Wall Street is beset with myriad challenges, including high P/E's, uneven earnings, highly contagious variants of the coronavirus, and the slow pace of vaccinations. But the most unsettling factor for the moment seems to be the hectic retail trading in highly speculative issues. Confidence in the Street's ability to police itself is now in question.
It is against this backdrop and ahead of a slew of corporate earnings reports that Wall Street begins a new week and month. As to earnings, on tap this week will be reports from such high-profile companies as Alphabet (GOOG), the parent of search engine giant Google, Amazon (AMZN), and Merck & Co. (MRK). Aside from concerns about profits, and the retail trading issues, the big event of the week will be Friday's jobs issuance. Here, expectations are that the unemployment rate will hold at 6.7% and that payrolls will rise by 58,000 after falling by 140,000 in December. It should be an interesting week.
– Harvey S. Katz, CFA
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
