Before The Bell
The upcoming five-day stretch of trading will again have the investment community focusing on the U.S. economy. First-quarter earnings season, which has proven to be a very successful one for Corporate America with more than 85% of the reporting S&P 500 companies exceeding expectations, is winding down and we are still about a week away from getting a bunch of quarterly results from the retailing sector; those companies report later in the cycle as their fiscal years typically end around January 31st. After a few quiet days to start the week, the news from business picks up on Wednesday with data on consumer pricing. That report from the Labor Department, along with the companion producer (wholesale) pricing data (due Thursday) will be highly scrutinized by the market for signs of inflation, which has been a hot-button topic for investors the last few months.
On Friday, the latest data on employment and unemployment drove trading. Specifically, the Department of Labor reported that nonfarm payrolls increased by 266,000, which was a far cry from the expectation of nearly one million new positions. However, the market moved higher on the news at the start of trading and held most of those gains to the closing bell. So why the move higher? The investment community likely took the more subdued figures, as a sign that the economy may not be in danger of overheating and the recent talks of interest rates maybe being raised ahead of the timeline laid out by the Federal Reserve last year is a bit premature. Following the disappointing job creation figures, Treasury bonds were in demand and yields subsequently fell. This was a good backdrop for the high-growth stocks, and in response the small-cap Russell 2000 and technology-heavy NASDAQ Composite delivered the biggest advances during Friday’s bullish trading session, which saw the Dow Jones Industrial Average and the S&P 500 Index finish the week in record territory.
In addition to the pricing data this week, investors will be looking forward to the latest (April) figures for retail sales. The expectation is that retail sales advanced nearly 10% last month, fueled by reopening of more stores and the massive stimulus package passed earlier this year. This report may give the stocks of the retailers a boost ahead of company earnings releases, many of which, including The Home Depot (HD) and Walmart (WMT), will come early next week.
So with the focus of Wall Street on pricing this week, and the inflation trade becoming more of the norm these days, where should investors look? Our sense is that the financial, industrial, and energy sectors would likely benefit the most from emerging inflationary pressures.
Meantime, the housing market got some attention from Wall Street on Friday. The reaction was to the report showing that home buying sentiment hit a 10-year low in April, as the housing market heats up into the busy spring season. Specifically, the Fannie Mae Home Purchase Sentiment Index fell 2.7 points sequentially, to 79 last month. The data suggest that prospective homebuyers with coronavirus-driven savings are having a hard time finding a home, given the limited nationwide supply. Total number of homes for sale in the U.S. fell to a historic low of 1.07 units in March. Unsold inventory sits at a 2.1-month supply at the current sales pace, down from the 3.3-month supply recorded in March 2020. This environment, despite, sharply rising raw material costs, is giving a boost to the publicly traded homebuilders that have the large inventories of homes. They are taking advantage of the resultant higher selling prices. The stocks of the new homebuilders, including industry giants Lennar (LEN) and D.R. Horton (DHI), have been on a tear for much of the last year and are sitting at record levels these days.
Before the opening bell, the equity futures point to a mixed opening for the U.S. stock market. The Dow 30 and S&P 500 futures are pointing to a higher start for the two large-cap indexes, while the NASDAQ and Russell 2000 futures are presaging a lower opening for the higher-growth stocks. Looking forward, we suggest investors keep a close eye on the aforementioned pricing data, which, along with last week’s jobs data, is putting the spotlight on inflation right now. This morning, we may again see some rotation out of the high-growth names and into some of the perceived value plays, though valuations are even looking frothy in those sectors.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
