Before The Bell
At the half way mark of August, the major equity averages, on the strength of supportive data from both Corporate America and the business beat, stand at or near record highs. Last week, Wall Street took the latest readings on consumer and producer prices in stride, electing to focus on signs that some of the inflation looks to be transitory despite the headline figures showing notable increases in prices. The pricing data, along with a strong jobs report earlier this month, have kept the bears at bay and pushed the U.S. equity market into rarefied air. That said, the equity futures are suggesting that there will likely be some profit taking at the start of the new trading week stateside (more below).
On Friday, investors shrugged off a very dour report on consumer sentiment. Specifically, the August reading tumbled 13.5% from the prior month, to a level that was just below the April 2020 low of 71.8 when COVID-19 lockdowns were at their peak. Consumers are concerned about the emergence and surge of the coronavirus’ Delta variant, which have brought fears that renewed lockdowns are a possibility as many states call for mask mandates for certain functions. Our sense is that the consumer sentiment figure may prove to be a bit of an outlier, as it was taken when fears about the Delta variant built.
Although the yield on the 10-year Treasury note, which is used as a benchmark to set the rate for bonds, retreated off of last week’s mid-week highs on the inflation concerns, our expectation is that the rate will eventually rise as we move later into the calendar year. Thus, we would use any pullbacks in some of the value, consumer cyclical stocks to build positions in the so-called inflation-trade equities. The financial and material sectors may remain a good place to explore, especially the latter group if the infrastructure bill now in the House of Representatives gets enough votes to head to the White House for the President’s signing.
Sticking with the consumer cyclical theme, the retailing sectors will grab the attention of Wall Street this week, with reports due from a number of the July-quarter ending retail companies, including the latest results from industry giant Walmart (WMT) before the start of trading tomorrow morning. The earnings results for the sector are expected to be strong, but our sense is that what the companies have to say about the next six to 12 months and the emerging Delta variant fears will play the biggest role in the performance of the retailing stocks. In addition to Walmart, we will get the latest results from mass merchandiser Target (TGT) and retail chain Kohl’s (KSS).
This week’s news on the economy also will put a spotlight on the retailing sector, with the July retail sales figures due at 8:30 A.M. (EDT) tomorrow morning. The consensus among economists is that retail sales dropped 0.2% on a month-to-month in July, following June's 0.6% gain. This would be the first monthly drop since May, though it would still leave retail sales significantly higher than last year's pandemic-depressed levels. The numbers also may be skewed by Amazon.com (AMZN) holding its annual Prime Day sales extravaganza a month early in June rather than in July, pulling forward the rush of spending and creating a tougher year-to-year comparisons.
In addition to the July retail sales figures, we will receive reports on industrial production and housing starts. These two releases will give insight on how two important contributors to the nation’s output (manufacturing and homebuilding industries) are faring. Wall Street also will be looking at the minutes from the latest FOMC meeting (due at 2:00 P.M. EDT on Wednesday) for more clues about what the central bank is thinking with regards to if and when it will start tightening the monetary reins. Typically equities don’t fare as well when interest rates are on the rise, especially the higher-growth areas like technology and the small-cap universe. There is momentum building that the Fed will begin tapering its bond buying at the September FOMC meeting.
Before the opening bell, the equity futures are indicating some selling for the U.S. stock market. There are a few factors that are pressuring stocks this morning, including the aforementioned possibility of a Fed tapering timeline change, the fears about the Delta variant, and the political turmoil in Afghanistan, where the Taliban has taken control of the country and its main city of Kabul. The instability in the region, which has prompted an emergency meeting on the United Nations’ security council this morning, may well eventually threaten some of the global commodities supplies, as that nation is rich in minerals, and given the global dependency on oil from the broader Middle East region.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
