Before The Bell
The name of the game on Wall Street these days is volatility. It was front and center last week, with a number of pronounced swings in trading seen during the five-day stretch. The major averages started the week on a positive note, then suffered a number of setbacks before rallying forcefully on Friday. The rebound on the week’s final day pushed the Dow Jones Industrial Average and S&P 500 Index into positive territory for the week and narrowed the loss for the NASDAQ Composite. Our sense is the volatility will continue over the few weeks and possible month as Wall Street weighs the negative threat of rising bond yields to stocks versus the rollout of the COVID-19 vaccines that many economists believe will give a big boost to the U.S. economy over the second half of 2021. This morning, we are looking at some profit taking after Friday’s gains, with the most pronounced selling again on the NASDAQ Composite.
On Friday, the market got a boost from an encouraging report on the U.S. economy. Before the market opened, the Department of Labor reported that nonfarm payrolls expanded by a stronger-than-expected 379,000 positions in February and the January figure was revised higher. That data was accompanied by a drop in the nation’s unemployment rate to 6.2%. It was a positive sign that more workers are returning to the labor market and the figures will get better when the three approved COVID-19 vaccines developed under Operation Warp Speed reach a greater portion of the U.S. population. The strong jobs data and the expectations of more states further opening their economies gave a boost to equities on Friday. All told, the Dow 30, the NASDAQ Composite, and the broader S&P 500 Index advanced 572, 197, and 73 points, respectively, during the bullish session. It also should be noted that the small-cap Russell 2000, which started the session deep in the red, reversed course and then proceeded to finish the day more than 2% to the upside.
So what are some of the themes driving stocks on Wall Street? The big one is rising bond yields. While this may be a sign of a stronger economy ahead, it has also brought concerns about inflation and is starting to make fixed-income holdings a bit more attractive investments, especially to income-oriented investors with a conservative bent. The rising rates have hurt the high-growth technology sectors and prompted a good bit of profit taking in an area that led the recovery from the COVID-19-induced selloff last year. Against this backdrop the NASDAQ Composite is close to being in correction territory after the recent selloff. Taking a big picture look at the sector, we think the recent move downward may eventually create some buying opportunities among the large-cap names that are testing some technical lows, including the likes of Microsoft (MSFT), NVIDIA (NVDA), and Apple (AAPL).
With the economy showing selective signs of strengthening and U.S. consumers sitting with a pile of savings accumulated during the coronavirus shutdowns, we think some of the value names in the consumer discretionary areas, like retail, should be given a closer look by investors. Many of these stocks underperformed the market last year and could get a boost from a spike in consumer spending during the second half of this year. And for those still a bit unnerved by the recent increase in equity market volatility, the stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line may be a good landing spot for investors. These high- and good-quality names, as a whole, have historically outperformed the market during turbulent periods, which we have gotten a glimpse of since mid-February.
Looking ahead to the week at hand, it will be a rather light week of news from both the earnings and economic fronts. Indeed, a largely successful fourth-quarter earnings season is mostly in the books, while there are only a few key reports from the business beat. Those two reports are on consumer and producer (wholesale) prices on Wednesday and Friday, respectively. They, with the current backdrop, will be closely watched for signs of inflation. Speaking of inflationary pressures, investors should keep close tabs on the oil and gas markets, where prices continue to move notably higher. A combination of lower crude production in the United States, planned cuts in supplies from OPEC, and economies around the globe opening up further, is driving prices higher, and giving a boost to some of the energy stocks. Some of the value plays in the energy sectors, which were out of favor last year, are starting to draw the interest of Wall Street. On point, over the weekend we learned that China’s exports expanded by more than 60%, year over year, in the January-February period, another major sign of a continued recovery in the world’s major economies and the likely need for more crude oil in the coming months.
Before the market’s open, the equity futures point to some modest selling stateside. So far overseas, the results have been mixed. The main indexes in Asia finished notably in the red overnight, while the major European bourses are sporting gains as trading moves into the second half of the session on the Continent. Investors should note that bond yields hit 1.60% this morning, a level that triggered some selling in the U.S. equity market last week. Treasury yields are climbing further after Congress made headway toward passing another significant COVID-19 relief package. The Senate passed a $1.9 trillion virus relief package over the weekend and it now goes up to vote in the House of Representatives tomorrow. The additional stimulus will likely boost the pace of the economic recovery and may trigger some more inflation worries on Wall Street. Will this weigh on the high-growth, tech-heavy NASDAQ Composite today? The initial signs point to such. 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.
