Before The Bell
The final three trading days of the month of June will begin with the major U.S. equity indexes sitting just off of record highs, a few of which were reached in the most recent five-day stretch of trading. Indeed, the Dow Jones Industrial Average, the S&P 500 Index, and the tech-heavy NASDAQ Composite advanced 3.4%, 2.7%, and 2.4%, respectively, last week. In general, buying was broad-based, even with some sector rotation, at times, on display.
Pushing stocks higher recently, despite concerns earlier this month that the Federal Reserve may begin to tighten the monetary reins sooner than the timeline proposed last year, were a few factors, including soothing comments last Tuesday from Federal Reserve Chairman Jerome Powell. The Fed leader in testimony before Congress said that the central bank will remain aggressive in its support of a labor market recovery and that the lead bank still believes that the recent inflation will prove transitory in nature, once some of the supply-chain disruptions from the coronavirus pandemic are resolved. These comments, coupled with the recent retreat and then stabilization of Treasury yields, particularly of longer duration bonds, gave a big boost to the high-growth sectors, with a notable rotation back into the technology stocks in the most recent week. Investors should note that the small-cap Russell 2000 Index is up 18.2% year to date, which is the best first-half performance since 1991. That said…
We still think that the inflation trade will prove fruitful for those who own stocks, as there is no denying that prices are on the rise. Both producer and consumer prices soared in May, and the Federal Reserve at its most recent FOMC meeting raised its 2021 inflation target from 2.5% to 3.4%. For those contemplating some of the value-oriented cyclical names that will be best suited to perform well in an environment of higher prices, even if the stretch is short term like the Federal Reserve is predicting, we think the best industries to look at are those with companies that have an ability to raise prices. The energy and basic materials sectors are two groups that come to mind. These two sectors also would likely benefit from the passage of an infrastructure bill on Capitol Hill.
Looking to the week ahead, the investment community’s focus is likely to remain on the Federal Reserve and the business beat. On the latter front, we will get a few important reports on the U.S. economy, including the much-anticipated data on June employment and unemployment on Friday. That data may have a big impact on trading leading into the long Independence Day holiday weekend. Before we get to that point, though, we will get reports on consumer confidence, pending home sales, private-sector job creation, initial weekly unemployment claims, and manufacturing activity. Tomorrow’s consumer confidence report will give more insight into how the consumer is feeling, as the U.S. economy approaches a full re-opening. On Friday, we learned that personal spending fell 2% in May after sliding 13.1% in the previous month. This may have actually helped the market, as it was expected to be watched closely by the Fed to get a gauge on how the economy is doing. The disappointing figures may give the monetary policy doves, who think the central bank should be very measured and not raise interest rates too prematurely, more ammunition.
Before the bell, the futures are pointing to a mixed, but relatively flat opening for the U.S. stock market. So far overseas trading has produced a similar story. The main indexes in Asia finished relatively unchanged overnight, while the major European averages are hovering around the neutral lines as trading moves into the second half of the session on the Continent. Investors should note that New York Federal Reserve President John Williams, a historically dovish member, will speak today on monetary policy. Mr. Williams’ commentary may grab some of Wall Street’s attention, which has been mostly fixated on central bank news and inflation over the last fortnight, especially with second-quarter earnings season still about two weeks away from heating up. 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.
