Before The Bell
The investment community returns from the long Independence Day week fresh off a five-day stretch of trading that did not produce any fireworks, but was another winning week for Wall Street. A confluence of factors came together to push the major stock averages to record highs. The news on both the economic and inflation fronts made for good readings, and the bulls responded in kind. Fresh off a first-half that saw the S&P 500 Index deliver a 14.4% return, the broader large-cap index added to those gains during the first two bullish trading sessions of July, a month that has historically been a productive one for equities.
On Friday, the attention of investors was clearly on the labor market, and the June employment figures didn’t disappoint. Specifically, the Department of Labor reported that nonfarm payrolls rose by 850,000 positions last month, and although the unemployment rate ticked up, it was another sign that the labor market and the broader economy are sharply recovering from the damage done by the coronavirus pandemic. The government’s figures came on the heels of a good report on private-sector job creation from Automatic Data Processing (ADP) and a notable drop in initial weekly unemployment claims, which fell to a pandemic-era low in the latest week. The strong employment figures emboldened the bulls on Friday, with the Dow Jones Industrial average, the NASDAQ, and the aforementioned S&P 500 Index adding 153, 117, and 32 points, respectively, to the prior four days of mostly gains. The small-cap stocks, though, did not join in Friday’s buying spree, with the small-cap Russell 2000 falling 24 points (or 1.0%) on the day.
The strong job creation figures notwithstanding, the slightly less-than-expected increase in the average hourly wages during the month of June likely played a big role in Friday’s buying. Investors took the wage growth as a sign that inflation may not be spiking as much as what some traders feared in the early part of June, when higher Treasury yields rose, with the 10-year note topping the 1.75% mark. The subsequent pullback in yields (the 10-year Treasury rate fell further Friday on the labor market data), along with calming comments of late from Fed Chairman Powell who continues to say that inflation will prove transitory when the coronavirus supply-chain disruptions are resolved, has been music to the ears of those with positions in the high-growth stocks, particularly in the technology sector. In general, the large-cap stocks of the technology leaders have been doing well of late after a retreat earlier this year.
So what is in store for market participants in this abbreviated four-day trading week? With second-quarter earnings season just about a week away from commencing with releases from a number of the banking giants, including JPMorgan Chase (JPM), the news from the business beat will continue to get the lion’s share of attention. Over the next four days we will get data on nonmanufacturing activity (tomorrow) and initial weekly jobless claims (Thursday). The investment community also will be paying close attention to the minutes from the Federal Reserve’s latest monetary policy meeting (due Wednesday afternoon at 2:00 P.M. EDT). This readout should provide more clues to what the central bank leaders think about employment, prices, and monetary policy.
Before the opening bell, the futures are indicating a mixed and relatively flat start for the U.S. stock market. So far overseas, trading has been slightly bearish. The main indexes in Asia finished nominally lower overnight, while the major European bourses are modestly in the red, as trading moves into the second half of the session on the Continent. Investors appear to be eying the oil market after news broke over the holiday weekend that there was a breakdown in negotiations between OPEC+ members, with Saudi Arabia and the United Arab Emirates in an impasse over production cuts. The gathering, which started with a tentative deal to increase output, given the elevated energy demand during the COVID-19 pandemic, however, in the end did not produce an agreement. The reports have sent prices of crude both here and on the Continent higher. The energy sector will be one area to watch during this week’s first trading session. 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.
