Before The Bell
The final trading week of February was a wild and quite volatile one for equity market participants. Over the course of the five-day stretch, we saw some bifurcated performances, with disparate results from the Dow Jones Industrial Average and the NASDAQ Composite, but the overall undertone was decisively bearish. For the week, the scales were tilted in favor of the bears, punctuated by a sharp selloff by all of the major indexes last Thursday. The primary culprit behind the selling—and in many cases profit taking as the averages hit record highs earlier in the month—was the spike in bond yields over the last fortnight; the 10-year Treasury note hit 1.60% last week, the highest level since before the pandemic. This morning yields are easing further from Friday’s pullback and that, along with the approval of a third coronavirus vaccine over the weekend, is bringing the bulls back to the market.
Last week, the rise in fixed-income yields stoked inflation worries on Wall Street. This drove traders away from the high-growth sectors, most notably the technology names, and into the value names. As we noted last week at this times, volatility was on the rise and subscribers may well try to add some downside protection to their stock portfolios by giving a close look at the stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line—and we continue to do so as we begin the month of March. These high- and good-quality issues as a whole have historically outperformed the market during turbulent times, which we have gotten a glimpse of in recent trading sessions. On point, notwithstanding, the 470-point decline in the Dow Jones Industrials last Friday, the index of 30 bellwether companies has fared better than the tech-heavy, high-growth NASDAQ Composite. For the five-day stretch, it was still a sea of red ink, with the Dow 30, the broader S&P 500 Index, the NASDAQ, and the smaller-cap Russell 2000 suffering respective setbacks of 1.8%, 2.4%, 4.9%, and 3.0%. Clearly as evidenced by the performances of the latter two averages, investors punished the riskier, high-growth areas. That said, technology will likely prove to be the big winner long term, led by the likes of Apple (AAPL), Amazon.com (AMZN), and Alphabet (GOOG), so the recent selling may eventually present a nice opportunity for those with a longer-range investment horizon.
The higher bond yields, in addition to prompting worries about inflation on Wall Street and fears that the Federal Reserve may have to eventually rethink their stance against tightening rates the next few years, are making less risky fixed-income holdings more desirable for income-oriented investors and those that think the overall market has recovered too far and too fast from the coronavirus-driven selloff nearly a year ago when the outbreak occurred stateside.
So what will investors be focusing on in the week ahead? The five-day stretch will start with attention on another coronavirus stimulus package—it passed in the House of Representatives, but now goes up for debate in the Senate—and the aforementioned approval of the Johnson & Johnson (JNJ) coronavirus vaccine. The likely passage of a stimulus package on Capitol Hill may give a nice short-term boost to the stock market, but the worries about the long-ranging ramifications when the bills come due from the multiple coronavirus-driven stimulus packages may continue to fuel inflation worries. Against this backdrop, we continue to recommend that investors look at the value names, particularly in the financial and industrial groups, which underperformed in 2020, as well as sectors that will likely benefit from President Biden’s more environmentally friendly policies. We also think the retailers may fare better later in the year from the continued rollout of the COVID-19 vaccines and U.S. economy opening up further.
At the end of this week, traders will likely focus on the February job figures, which will provide a major clue as to how the U.S. economy is doing. The data of late from the business beat have been mixed, but with a few surprisingly strong reports on retail sales and industrial production. In addition to the labor market figures, we will get data on manufacturing and nonmanufacturing activity this week, with the former coming a half-hour into today’s trading session. Last week, the latest estimate for fourth-quarter GDP was revised slightly higher (from 4.0% to 4.1%), but it did show a reduction in personal consumption as the virus’ resurgence in the final quarter of 2020 was felt. Hopefully, the vaccines, as noted above, will lead to a pickup in consumption in the quarters ahead.
Before the open, the equity futures point to a higher start for the U.S. stock market. So far overseas, the bulls are holding the upper hand. The main indexes in Asia finished sharply higher overnight, while the major European bourses are comfortably in positive territory as trading moves into the second half of the session on the Continent. The continued pullback in bond yields this morning and the approval of the third COVID-19 vaccine have equities rallying around the globe today. 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.
