Before The Bell
As we pass the midpoint of May, what we have learned so far is that trading this month has proven quite volatile. In general, we have seen some major moves by the bears quickly met by some equally notable responses from the bulls, and sometimes they have come in the same trading day. This trend played out again last week, as the major averages sold off sharply on a spike in consumer and producer prices and the inflation concerns it brought, before recovering markedly late in the week on a continued drop in initial weekly jobless claims and disappointing retail sales figures for April. Friday’s flat reading on retail sales did not feed into the narrative that the economy is overheating, and the major indexes were able to add to Thursday’s gains. This morning, the futures are now suggesting some initial profit taking off of the two-day market rally to close last week.
For the five-day stretch, the Dow Jones Industrials, the S&P 500 Index, and the NASDAQ Composite were down 1.1%, 1.4%, and 2.3%, respectively. It was the fourth-straight losing week for the technology-heavy NASDAQ. Notwithstanding the factors behind the late-week rally, the broader theme to trading has been a continued rotation out of growth and into the value stocks, with interest in the financial, energy, industrial, and material names picking up. These cyclical issues are most likely to perform well in an environment of higher prices fueled by a sharply recovering economy. Investors should note the recent surge in copper prices. Higher prices for the red metal is often signs of a very healthy economy, which tends to help the cyclical stocks.
This week, the retailing sector, fresh off of Friday’s disappointing retail sales data, will remain in the focus of Wall Street, with earnings from a number of the top retailers to be released. This includes the latest quarterly results from mass merchandisers Walmart (WMT) and Target (TGT) and home-improvement giants The Home Depot (HD) and Lowe’s Companies (LOW). The big box retailers fared very well during the coronavirus pandemic when one-stop shopping was desired, and that trend likely continued in the April quarter. However, investors will be most interested in hearing what these retailers are saying about the second half of 2021 when vaccinated consumers will likely be able to look at more retailers instead of settling for the one-stop shopping option. Many of the smaller retailing stocks that were pummeled during the early stages of the pandemic may have some appeal as recovery cyclical plays in the second half of this year, as the domestic economy further reopens.
The housing market will also be in the spotlight, with a number important reports due over the next five days. This morning will bring the latest home builder sentiment index; tomorrow we get the April figures for housing starts and building permits; and then the week concludes with Friday’s release of existing home sales data. The homebuilding stocks, for the most part, have performed very well over the last 12 months, but did pull back some last week on inflationary pressures and talk that the Federal Reserve may be forced to tighten the monetary reins sooner than expected. Higher lending rates or even the talk of less accommodative monetary policies by the central bank have historically not been a great backdrop for homebuilding and housing-related stocks. With many of the homebuilders trading at valuations not seen in quite some time, we would not be a buyer in an environment where thoughts of higher rates are building and raw material and labor costs are rising sharply.
The talk of inflation and interest rates is not likely to die down this week, and may even get ratcheted up with the minutes from the latest Federal Open Market Committee scheduled to be released on Wednesday afternoon. It will provide some insight to what the Fed thinks about the job market and inflation and if its stance on not raising rates until 2023 has changed at all. That release, along with the latest initial weekly unemployment claims data before the market opens on Thursday morning, may make for an interesting and possibly another wild trading stretch heading into the long holiday weekend; the market is closed next Monday for Memorial Day.
Before the opening bell, the futures, which were positive territory earlier this morning, have since fallen into the red and now point to a lower opening for the U.S. stock market. The new trading week has brought some Monday morning merger news, as reports just surfaced that telecom giants AT&T (T), the owner of HBO and Warner Bros studios, and cable TV and streaming network Discovery (DISCA), the creator of lifestyle TV networks, will combine their media assets. Wall Street appears to very optimistic about the potential deal, bidding the shares of both companies higher in pre-market action.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
