Before The Bell
The major equity indexes took a bit of a breather yesterday. This followed a wild stretch of trading days in which both the bears and the bulls each took control with pronounced moves of their own. This week began with traders their licking wounds from a selloff late last week on uninspiring comments from the Federal Reserve about the state of the U.S. economies and worries about escalating coronavirus cases and the slow roll out of developed COVID-19 vaccines. But that gave way this week to substantial buying during the first two trading sessions, prompted by some strong earnings results from Corporate America, hopes for another coronavirus stimulus package from Capitol Hill, and some better tidings about the vaccine distribution.
At the conclusion of yesterday’s trading session, the Dow Jones Industrial Average, the broader S&P 500 Index, and the tech-heavy NASDAQ Composite were not too far removed from the neutral line. The Dow 30, S&P 500 Index and the small-cap Russell 2000 were slightly higher, while the NASDAQ finished modestly in the red. From a sector perspective, it was close to an even split of up and down arrows among the 10 major equity groups. Of note, the energy sector rocketed higher, with a daily gain of more than 4%. The group benefited from a jump in oil prices, which settled at a 12-month higher yesterday afternoon.
The price of crude got a boost from reports that the Organization of the Petroleum Exporting Countries (OPEC) and its allies are committed to cutting production this month and next. The price gain came despite a smaller-than-expected weekly decline in U.S. crude supplies. If this sentiment continues, it may give a further boost to the stocks of the major oil producers, many of which underperformed last year as the coronavirus pandemic drastically reduced the need for oil. That said, we remain skeptical that this trend will continue, especially with travel still running well below pre-pandemic levels. The airline industry, which is a major consumer of oil, has noted that increased layoffs are likely in the coming months, with American Airlines (AAL) estimating 13,000 employees could be furloughed.
Meantime, the earnings news from the corporate world once again made for a mostly encouraging reading. The technology sector was in the spotlight yesterday morning, with industry behemoths Amazon.com (AMZN) and Alphabet (GOOG), the parent company of Google, handily beating expectations after the close of trading on Tuesday. The technology stocks continue to be the beneficiary of more people working, learning, and shopping from home. These reports followed very good results from Apple (AAPL) and Microsoft (MSFT) last week. That said, valuations in the information technology sector are looking very frothy right now, and the stocks would be ripe for some profit taking if the news were to disappoint. So far that has not materialized, hence the continued interest in the high-growth sector. For those looking at the space, we think the cloud computing and cloud-related companies may be the best way to gain exposure to the sector, especially with the coronavirus pandemic looking like it will remain an issue for several more months.
With the recent broad-based rally that retraced much of last week’s notable setback, stocks are still looking quite pricey. Thus, we think it may be a prudent time for investors to look at some of the blue-chip names as they are likely to provide the best downside protection against any possible correction in the months ahead. In fact, the stocks ranked 1 (Highest) and 2 (Above Average) for Safety by Value Line have historically outperformed the market when volatility picks up, which we have seen at times over the last week-plus of trading. This strategy may be the best option for conservative investors who want to stay heavily invested in equities in an environment where there are very few attractive alternative investments.
So what are the headline events today that may potentially drive the market? Aside from the initial weekly jobless claims, which came in this morning at 779,000 (the expectation was 830,000), the news from the business beat is light. Thus, another batch of quarterly reports from the corporate world and continued talks about a new fiscal stimulus package will likely draw the attention of Wall Street.
Before the open, the equity futures point to a modestly higher start stateside. Our sense is that investors may be a bit apprehensive about making another major move ahead of tomorrow’s much-anticipated monthly employment data from the Labor Department, which may provide clues about how the United States economy is faring as the coronavirus pandemic rages on. Last month’s report, which showed substantial job losses, was very disappointing. Stay tuned.
- William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
