Before The Bell
The first trading day of July, a month that has historically been good for stocks, particularly over the last decade, will have investors focused on the U.S. labor market. The major stock averages got some support yesterday from better-than-expected private-sector job creation—Automatic Data Processing (ADP) reported that payrolls increased by 692,000 in June—and this morning we learned that initial weekly unemployment claims fell to 364,000 in the latest week, another post-pandemic low. Both figures, which were the appetizers before the main course that will come in the form of the Labor Department’s June employment and unemployment data (due tomorrow), added to the view that the U.S. economy is recovering sharply from the coronavirus pandemic. Investors also should be aware that June manufacturing activity data from the Institute for Supply Management will be released at 10:00 A.M. (EDT) this morning, and that report will give some more insight into how the manufacturing sector and the broader economy are doing.
The futures were mostly higher this morning leading into the claims data and are holding those levels following the release, suggesting that the major averages, which ended the first half of 2021 at or near record highs, will start the new quarter with more gains. (The broader S&P 500 Index climbed six points yesterday in route to delivering a 14.4% gain during the first six months.) That said, we would be surprised if the main indexes made a significant move today ahead of tomorrow’s June nonfarm payroll data, which will provide clues about the health of the U.S. labor market and inflation. On the latter front, market pundits will be watching the average hourly wage figure. That reading could change the sentiment about inflation, and play a role in the direction of the market on the week’s final trading day and ahead of the long holiday weekend. The U.S. equity and bond markets are closed on Monday in observance of Independence Day.
In recent sessions, we have seen a tug-of-war between cyclical and growth stocks. The retreat in Treasury market yields last week and recent stabilization around the 1.50% mark for the 10-year bond drove investors back into the high-growth sectors, which fell in early June on rising borrowing costs and sentiment that the Fed leaders were becoming a bit more hawkish on monetary policy. But after calming comments from Fed Chairman Jerome Powell, who reiterated that the central bank believes the inflationary pressures will prove transitory once the COVID-19 supply-chain disruptions are resolved, the investment community’s appetite for risk returned. The mega-cap technology names have done well in recent weeks. On that front, investors should keep an eye on the second-quarter vehicles delivery data from electric car maker Tesla (TSLA), which is due to be released today and has historically had an effect on the performance of the company’s high-flying stock. That said…
The inflation trade should not be ignored, as many on Wall Street think that even if the pricing pressures prove transitory as the Federal Reserve predicts, bond yields will move higher over time. The massive fiscal spending and monetary stimulus of the last year and a half to combat the ill effects of the coronavirus on the U.S. economy is likely to put some upward pressure on bond yields down the line. This process could be expedited if the central bank were to reduce its bond-buying program later this year. The energy and financial groups, which were the two-best performing sectors in the first half of this year, should be areas where investors continue to look. The earning power of the banks would probably benefit from higher rates, while the oil companies are best positioned to take advantage of higher prices. The importance of their products to the everyday lives of people make it an area where consumers can’t find a seamless alternative. On point, travel is predicted to return to pre-pandemic levels for the July 4th holiday weekend, which will increase demand for gasoline and likely drive crude prices higher. The price of benchmark WTI oil is up around 2.5% this morning, topping the $75-a-barrel mark.
We think the recent rotation back into the high-growth sectors may present an opportunity in some of the cyclical areas, which have pulled back from recent highs. Investors may want to keep an eye on the stocks in the airline, travel and leisure, and hospitality industries that have not fully recovered to pre-pandemic levels. These industries, along with some recreation and retail companies, may benefit from a full re-opening of the U.S. economy and consumers sitting on savings from the lack of activities—and the lower expenses incurred —during the pandemic. On Tuesday, the Conference Board reported that U.S. consumer confidence jumped to its highest level since February, 2020, the period just before the outbreak of the coronavirus stateside.
Although the month of July more often than not has been good to investors long in equities, the dog days of summer for the U.S. stock market lie ahead for investors. Since market valuations look stretched these days and inflation may represent a near-term threat for equities, a correction down the road to take some recent froth out of the market can’t be ruled out. Given this backdrop, we recommend subscribers hold on to a substantial allocation to equities. Those of a conservative bent would do well to give the stocks ranked 1 (Highest) or 2 (Above Average) for Safety a close look. Our Large-Cap Conservative Model Portfolio which is updated weekly, could serve as a springboard for building a portfolio of blue-chip stocks that offer growth opportunities, but also may help to preserve capital when volatility picks up.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
