Before The Bell
At 8:30 A.M. (EDT), we received three important reports from the business beat, and two of them made for favorable readings. The Labor Department reported that initial weekly jobless claims came in at 406,000, the lowest level in the coronavirus pandemic era. This, along with the first-quarter GDP estimate holding steady at an annualized rate of 6.4%, but including a sharply higher revision in the personal consumption component, were more signs that the U.S. economy is on an upward trajectory and that output will probably strengthen anew in the second half, as the domestic economy opens further. It also should be noted that while durable goods orders were down 1.3% last month, versus the expectation of a nearly 1% gain, the measure excluding transportation was actually up 1%. The car and other vehicle industry has been constrained by the much-discussed shortage of computer chips necessary for their production.
The major equity indexes have produced mostly positive results so far this week. Supporting the market appears to be further declines in U.S. COVID-19 cases and hopes that a continuation of this trend will fuel economic growth in the second half of this year. The equity futures, which were mixed heading into the economic releases, are still trading that way, but do suggest a slightly positive mood on Wall Street to start the second to last trading day of May.
The overall solid economic data released today may again work in the favor of the travel, leisure, and recreation stocks. Two other sectors to watch today are infrastructure and financial, as Republican Senators will resume their negotiations with the Biden Administration on an infrastructure deal, while the top banking CEOs continue their testimony before Congress on a number of financial issues.
With the attention of Wall Street turning to the economy, and the worries about inflation lessening a bit, at least for the moment (the yield on the 10-year Treasury note has steadied a bit around the 1.60% mark in recent days), traders also have been circling back to some of the high-growth stocks. The technology-heavy NASDAQ Composite (up 0.6% yesterday) and, more so, the small-cap Russell 2000 (+2.0%) have seen money flow back in this week.
In the technology space, the telecommunications, semiconductor, and some of the old-line tech stocks have been in demand. With investors still a bit apprehensive about inflation intensifying later this year, the focus of Wall Street seems to be on adding shares of the industry giants that produce the biggest profits and have the more stable outlooks. (This is giving support to the FANG stocks as well.) These companies currently look more appealing than the high-flying tech names that skyrocketed last year, but have yet to deliver consistent profits and trade at valuations that don’t look sustainable, especially if lending rates start to move higher. On point, shares of Snowflake (SNOW) are melting some in pre-market action after the cloud-based software company reported that its losses are growing at a similar pace to its sales totals.
The technology sector will dominate today’s earnings talk. In addition to the Snowflake news, we learned after yesterday’s closing bell that semiconductor maker NVIDIA (NVDA) beat expectations on both the top and bottom lines. The stock of this more-established technology company, even with concerns that chip shortages would likely constrain volume in the second half of the year, is now trading higher in pre-market action. This afternoon, Wall Street will await the latest quarterly results from Dow-30 component salesforce.com (CRM). Much like the entire tech sector, it has been a rollercoaster ride for salesforce.com stock this month.
In general, with the economy expected to heat up in the summer and fall months, we still think a prudent investment strategy, especially for those with a conservative bent, would be to continue looking at the value and cyclical stocks, but also not to shy away from the big technology companies, as that sector still offers the best long-term growth potential among the top-10 equity groups. We think the stocks ranked 1 (Highest) and 2 (Above Average) for Safety by Value Line would be a good place to start, as this group has historically protected capital when a correction occurs. With the Dow Jones Industrial Average and S&P 500 Index currently sitting just 2% and 1% below their respective all-time highs, the possibility of a correction at some point has to be considered when tinkering with the current composition of an equity portfolio.
– William G. Ferguson
At the time of this writing, the author did not hold positions in any of the companies mentioned.
