Before The Bell
The major stock market averages continue to grind higher despite a resurgence in COVID-19 cases with the spread of the Delta variant. Strong earnings and economic growth, combined with very supportive Federal Reserve policies, are providing the needed support.
The increase in coronavirus cases so far is hurting some companies in the travel and leisure sectors, as well as the energy space. Oil prices have come off of their highs on concerns that the recovery will be slowed as not as many people venture out after a year of relative confinement. The sight of people wearing masks in public is becoming more common again, even for those that have been vaccinated.
It remains to be seen how widespread the new strain of COVID-19 becomes. Relatively high vaccination rates in the United States suggest the damage will be contained.
In terms of the economy, meanwhile, elevated levels of hiring provide reason to be optimistic about business conditions. “Help Wanted” signs are plentiful these days, and provide assurance that consumers will have money to spend in the months ahead.
On the down side, inflation has reappeared after a long quiet stretch, making the affordability of certain goods and services an issue for the budget conscious.
With respect to the markets, though, the Federal Reserve’s stance that the rising price environment will largely pass after conditions normalize is so far helping to keep long-term inflation expectations in check. Bond yields have not taken off as they might have in the past as a result. Investors essentially expect inflation to slow down materially once the pandemic and its aftermath fade away. The sustained period of low yields is clearly a plus for stocks, given the lack of alternatives.
Treasury yields are still expected to rise somewhat if the economy keeps perking up, but may not surge given the large amount of cash on the sidelines looking for what is perceived as a comparatively safe home.
On Thursday, the major stock indexes turned in a tame performance, with the Dow Jones Industrial Average inching ahead 15 points; the S&P 500 climbing 13 points; and the NASDAQ adding 51 points. But those gains were enough to push the Dow and the S&P to record highs.
Market breadth was divergent, however, with decliners topping advancing issues on both the NYSE and the NASDAQ. A bit of a retreat in smaller cap stocks also indicated a bias in favor of larger cap names.
Overall, investor sentiment may remain broadly favorable as long as the Delta variant does not cause too much damage. Stock futures this morning point to a mixed-to-modestly-higher open.
– Robert Mitkowski
At the time of this writing, the author did not have positions in any of the companies mentioned in this article.
