Before The Bell
The major equity averages turned in a ho-hum performance yesterday. After delivering gains during the week’s first session, the indexes finished yesterday none too far removed from the neutral line. Our sense is that investors were unwilling to make any major moves prior to today’s anticipated monetary policy decision from the Federal Reserve and commentary from Treasury Secretary Janet Yellen. Investors are waiting to see what the central bank’s assessment of the U.S. economy is following the passage of a $1.9 trillion stimulus package and some positive news of late on the coronavirus vaccine front. Overall, it is looking like a mixed start to the day stateside, with the NASDAQ Composite under some selling pressure at the commencement of trading. A move higher in Treasury yields this morning is likely the reason behind the expected lower start for the NASDAQ.
The U.S. stock market, notwithstanding yesterday’s blasé showing, has performed well of late, fueled by the aforementioned stimulus package passage and expectations that the continued roll out of the COVID-19 vaccines will give a big boost to the economy during the second half of this year. The recent jobs creation data are indicating the employment sector is recovering quicker than many pundits had previously forecasted. These good tidings are providing some support for equities and reducing the anxiety in the stock market. Investors should note that the CBOE Volatility Index (or VIX), also known as the “fear gauge” fell to its lowest level yesterday during the COVID-19 pandemic. The stock market is typically forward looking and signs of a stronger output in the second half of the year, helped by more inoculated people starting to travel and move around more, is helping stocks. That said…
The elephant in the room will continue to be fears about inflation. Stocks have already gotten a haircut recently, with the tech-heavy NASDAQ falling into correction territory earlier this month, on worries about rising Treasury yields and inflation. As noted the U.S. economy will be the focus of Wall Street this afternoon when the Federal Reserve announces its latest monetary policy decision and Treasury Secretary Janet Yellen speaks. The central bank is expected to keep rates steady, but the Fed’s assessment of the economy, interest rates and the employment picture may have an effect on the market. We have recently seen that rising bond yields can spook equity investors, as fixed-income investments become attractive alternatives to stock in such an environment, so the best commentary from the Federal Reserve would be that inflationary pressures look benign and there is still a lot of more improvement needed to be seen on the employment front. This would not threaten the current consensus that the central bank will remain wedded to accommodative monetary policies, which is a favorably backdrop for stocks. Data released yesterday showing a 3% decline in February retail sales and a seasonally adjusted 2.2% drop in industrial production likely quelled some near-term talk of the U.S. economy overheating and inflationary pressures.
But what is an investor to do if renewed Treasury yield concerns were to further evolve? The yield on the 10-year Treasury bond hit 1.65% this morning. One sector to look at would be the financial stocks, especially the banks, as their earning power would be helped by higher lending rates. Another sector that could prosper in the coming months is infrastructure and some of the construction and construction-related stocks. The possibility of a major infrastructure bill later this year is real with the executive and legislative branches controlled by the Democratic Party. We also think that the retailing stocks, notwithstanding yesterday’s disappointing February retail sales figures, could get a boost from the U.S. economy opening up further during the second half of the year. While we think some caution may be necessary with the equity market valuations looking quite stretch, the accommodative central bank and recent economic stimulus will likely continue to provide some wind for the sails of the bulls as we approach the spring season.
Before the opening bell, the futures point to an uninspiring start for the U.S. equity market. Our sense is that the investment community may be unwilling to make any major moves ahead of today’s monetary policy decision at 2:00 P.M. EDT. The DJIA and S&P futures are hovering around the breakeven mark, but the NASDAQ and Russell 2000 futures point to a lower start for those two indexes. So far overseas, the trading has been rather muted. The main indexes in Asia finished nominally lower overnight, while most of the major European bourses are modestly in the red as trading moves into the session on the Continent. Our sense is outcome of today’s trading session stateside will ultimately be decided by the investment community’s reaction to the Federal Reserve’s monetary policy statement and the commentary from Treasury Secretary Yellen. 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.
