Before The Bell
The trading week on Wall Street will begin with investors looking for direction. The most recent five-day stretch proved to be a rather blaze affair, with the major equity averages never straying too far away from the neutral line and finding resistance any time they tried to make a move higher. The economic and earnings beats provided little catalysts, save for Thursday’s consumer pricing data. That is likely to change this week, as we will get a number of important reports on the U.S. economy, and the market will be closely watching what the Federal Reserve has to say on Wednesday afternoon following its monetary policy decision and statement (released at 2:00 P.M. EDT).
The news from the business beat heats up tomorrow morning, with three important releases before the market opens. The investment community will receive data on retail sales, industrial production, and producer prices. These reports will provide important clues as to how the domestic economy is doing and more insight on inflation. It may also bring the cyclical sectors into focus, including the retailing group. Our sense is that the retailing stocks, a number of which were pummeled last year during the heart of the coronavirus pandemic, will fare well in the second half of the year, as the U.S. economy fully reopens. Later on this week, we also get data on May housing starts and building permits (Wednesday) and initial weekly jobless claims (Thursday). The middle three days will be bookended by an empty economic calendar to start and end the week.
Perhaps, the main reason why the U.S. equity indexes have been unable to gain any traction recently is because investors are wrestling with the inflation scenario. The pricing and labor data of late have clearly shown a jump in pricing, but the recent notable retreat in Treasury bond yields suggest the market participants believe that we may be at peak inflation, and that the higher prices may be transitory, the theory pushed by the central bank. Our sense is that whether the recent inflation proves transitory in nature, along with how the Federal Reserve handles bond tapering and interest rates in the coming months, will have the greatest impact on trading this summer. This is why equity investors should focus in on Federal Reserve Chairman Jerome Powell’s press conference at 2:30 P.M. EDT on Wednesday. That event may have the biggest impact on trading this week.
From an investment perspective, we continue to recommend that investors keep a heavy concentration of stocks in their portfolios. But with the inflation concerns lingering, we would continue to look at the value names in the cyclical industries. If prices continue to steadily rise, the energy and basic materials sectors would remain interesting groups to hold. That said, we would still keep a healthy stake of technology stocks, with those of the industry giants looking the most appealing. In fact, from a technical standpoint, shares of Amazon.com (AMZN) look like they are primed to break out from their recent trading level. Most of these blue-chip technology stocks are ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line, owing to the companies’ strong finances and bloated cash positions. The technology sector also offers the best long-term growth potential among the top-11 sectors.
Before the opening bell, the equity futures are presaging a relatively flat start for the U.S. equity market. Historically, the major averages have not strayed too far away from the neutral line in the days leading up the Federal Reserve’s monetary policy decision and that looks to be the case again this morning. However, after another very light day of earnings and economic news to start the week, the mettle of investors may be put to the test tomorrow with the aforementioned retail sales and producer (wholesale) pricing data on the docket. Stay tuned.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
