Before The Bell
The final trading week of May, a month that has proven quite volatile for investors, will again have traders focused on the U.S. economy and inflation. The first-quarter earnings season is now mostly in the record books, and while it was a good one for Corporate America, it did not provide a jolt to stocks as much of the good news was already priced into equity valuations at the commencement. The wild trading sessions of late, including much of last fortnight, has seen worries about inflation and the Federal Reserve tightening the monetary reins sooner than expected pitted against solid economic data and hopes that further economic openings will bring strong second-half output. The latter is forefront this morning, as U.S. COVID-19 cases fell to the lowest level since March, bringing increased hopes of a full re-opening this summer, and the futures are suggesting a higher opening stateside on this optimism.
It was a mixed session for stocks on Friday. The Dow Jones Industrial Average and the small-cap Russell 2000 produced respective gains of 0.4% and 0.3%, while the NASDAQ Composite and the broader S&P 500 Index ended with modest declines of 0.5% and 0.1%. Overall, the Dow and S&P 500 Index recorded its second-straight weekly decline, while the tech-heavy NASDAQ snapped a four-week losing streak.
The main theme on Wall Street this spring has been the rotation out of the high-growth stocks and into the value names. As noted, this has been brought about by continued concerns about inflation and the possibility that the central bank will raise interest rates ahead of its planned target of 2023. The value stocks in the cyclical areas have been the beneficiary of late, with the thought being that the industrial, financial, energy, and consumer staples companies would fare the best in a period of higher prices. They have the best ability to pass the higher costs along to the consumer, as people need food and energy products to live their lives. The earning power of the financial companies, particularly the banks, would be enhanced by higher lending rates. Investors, though, should note that this recent sector rotation is starting to make some of the value stocks a bit expensive versus their historical norms. Perhaps, the reason why we are seeing some selective movement back into the recent out-of-favor groups.
On point, the technology stocks, which have been hurt thus far in 2021, fared better during the most recent five-day stretch and was the main reason the NASDAQ, as noted above, produced its first winning week in more than a month. The tech space was helped by steadying bond yields, which saw the 10-year Treasury note end last week at 1.625%, and it has fallen further this morning. Within the technology space, a recent trend has seen interest pick up in the more established old-line companies and the FANG stocks, while the high-flying stocks of 2020, including Tesla (TSLA) and many of the financial-tech issues, such as Square (SQ) get hit hard. Many of those companies, which have yet to produce yearly profits, entered the year at unsustainable valuations. This was the same thought process by investors punished by the high-flying cryptocurrency market last week. The more mature technology companies that produce the consistent and, at times, big revenue and earnings gains appear to be the choice of skittish investors these days.
Looking ahead to the new trading week, we will get some important reports on the U.S. economy, including the latest data on new home sales and consumer confidence tomorrow. Then after a quiet day on Wednesday, investor focus will again shift to the business beat on Thursday with reports on initial weekly jobless claims and the first revision to the March-quarter GDP estimate. Then the week ends on Friday with data due on personal income and spending and consumer sentiment. Those releases could again bring the focus on the U.S. consumer and the retailing sectors. The prevailing sentiment on Wall Street is that the retailing companies will get a big boost in the second half of the year on a likely full economic re-opening. The travel, leisure, recreation, and restaurant stocks have fared well of late on this optimism. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
