Before The Bell
The penultimate trading day of a week that has, thus far, seen a spike in equity market volatility—and some notable selling—on pricing data and inflation worries, will start with investors focused on a couple of reports from the Labor Department. Yesterday, the major equity averages sold off sharply on the largest increase in consumer prices in 12-plus years and fears that those inflationary pressures may force the Federal Reserve to raise interest rates sooner than anticipated. This morning, we received the companion report on producer (wholesale) prices and another reading on unemployment insurance, and the equity futures, which turned slightly positive in the minutes leading into those economic releases, are holding those gains and suggesting some bargain hunting off of yesterday’s selloff when the market opens stateside.
At 8:30 A.M. EDT, the producer price index did nothing to quell the escalating inflation concerns. Specifically, the Department of Labor reported that producer prices jumped 6.2% year over year in April, the largest advance since 12-month data were first calculated in November, 2010. That data, along with a 4.2% increase in consumer prices last month, are stoking concerns about inflation and taking a bite out of the high-growth stocks. Shares of the many of the technology companies, which were the “Darlings of Wall Street” when the coronavirus pandemic forced people to social distance for most of 2020, are getting slammed on fears that the central bank may be forced to revisit its stance on monetary policy.
Meantime, initial weekly unemployment claims (at 473,000) came in below 500,000 for the second-consecutive week, with new filings inching back toward pre-pandemic levels as more vaccinated Americans return to work and in-person activities. It was another sign that the labor market, despite last month’s disappointing jobs creation figures, and the U.S. economy, are improving. However, the improved employment data bear near-term watching, as it also may advance the narrative that the U.S. economy is starting to overheat and that may force the Federal Reserve to pull back on its quantitative easing measures. This would not be an ideal backdrop for equity investing.
So with the escalating inflation concerns igniting a notable selloff on Wall Street, where should skittish equity investors turn? As we noted in our market commentary to start this week, a good place to begin would be with the financial, energy, and consumer staples sectors. Historically, these value areas have performed the best during periods of rising prices.
Sticking with this theme, we recommend looking at the companies that have the best chance of pushing higher commodity costs onto the consumer without the fear of losing business. The food processors and energy companies come to mind, as people (both in good and bad times) need food and energy products to conduct their daily lives. Not surprisingly, the stock of General Mills (GIS), along with those of a number of its food processing peers, held up relatively well during yesterday’s notable down tape. Conversely, the homebuilding stocks, which recently hit all-time highs, sold off on the possibility of high lending rates in the future. The yield on the 10-year Treasury note topped the 1.70% mark this morning.
Value Line subscribers also would be wise to take a closer look at the stocks ranked 1 (Highest) or 2 (Above Average) for Safety. This group, which includes many of the blue-chip companies with strong cash flows, have historically outperformed the broader market during turbulent times. The CBOE Volatility Index (or VIX) rose 26% yesterday, so investors, especially those with a high concentration of high-growth stocks in their portfolios, are clearly unnerved and a continued rotation out of the technology and the small-cap sectors and into the value names may remain in vogue on Wall Street.
Overall, our recommendation is that investors don’t panic and stay the course. While the last few sessions have no doubt been painful for those long equities, the major equity averages did start the week at or near record levels and a correction to clean up the froth in the stock market may prove constructive for stocks in the long run.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
