Before The Bell
The start of the summer season commences with investors wondering if it will be the beginning of a volatile few months. The selling on Wall Street picked up over the second half of last week following the Federal Reserve’s monetary policy decision and statement last Wednesday afternoon. Shaking the equity market were signs that the central bank’s outlook is becoming a bit more hawkish, despite making no changes to the near-term interest-rate policy and asset purchasing programs. Reports that more Fed District leaders were now in favor of moving up the start of monetary tightening from the original time line put forth by the central bank last year roiled investors.
On point, the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite fell 1.6%, 1.3%, and 0.9%, respectively, during last week’s final session. It should also be noted that the small-cap stocks were down more than 2% during Friday’s bearish session. There was clearly a rotation out of risk and into more safe-haven instruments. In fact, the yield on the 10-year Treasury bond, which moves inversely to the price, fell sharply, as investors were spooked by signs pointing to a possible more hawkish central bank.
Overall, the high-growth stocks in the technology heavy NASDAQ Composite held up a bit better than the broader market last week. The pullback in yields on the longer end of the bond curve gave some more credence to the Fed’s stance that inflation may prove transitory in nature, which would be a good thing for the higher-growth stocks down the road. The spread between the five and 30-year Treasury yield narrowed to the smallest margin since last August this morning. Conversely, the pullback in long-term yields hurt some of the banking stocks. The financial sector was among the biggest laggards on Friday, along with energy and utilities issues.
This week, the discussion about inflation and monetary policy will again be in the spotlight, as Federal Reserve Chairman Jerome Powell is scheduled to appear before Congress tomorrow afternoon at 2:00 P.M. (EDT). Given the market’s reaction to the Fed statement and Chairman Powell’s press conference last Wednesday, we would not rule out the possibility of a big move in the equity market on Mr. Powell’s comments during the final hours of Tuesday’s trading session.
In addition to Chairman Powell’s testimony, the eyes of Wall Street will be on the business beat this week, as we are still more than three weeks away from the commencement of second-quarter earnings season. The economic calendar includes reports on existing and new home sales, durable goods orders, personal income and spending, initial weekly jobless claims, and the final revision to the first-quarter GDP estimate. The personal expenditure data should be closely monitored on Friday, as it serves as the Federal Reserve's preferred gauge of inflation. The consensus is that the report will show a 3.4% year-on-year increase for May, marking the fastest jump in nearly 30 years, albeit while still reflecting "base effects" as prices rebound from last year's pandemic-depressed levels.
Meantime, we would keep an eye on the homebuilding stocks this week, given the forthcoming housing data and the attention bond yields are getting these days. The homebuilding stocks moved higher last week on falling long-term yields and an encouraging quarterly report from industry leader Lennar (LEN), which included raised revenue and earnings guidance.
Before the opening bell, the equity futures, which were in the red overnight, have reversed course and are now indicating some buying when trading commences stateside. We think it may be the case of some bargain hunting following a disappointing five-day stretch stocks last week. But how long will these good tidings last? Our sense is it will depend a lot on what is taken from Fed Chairman Powell’s commentary on inflation and monetary policy tomorrow afternoon. 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.
