Before The Bell
The U.S. equity market, after a bullish start to the week on Monday, in which it built off the strong rally to end last week, has pushed forward at a very moderate pace over the last two trading days. Our sense is that restrained market reaction may continue today, at least at the start of trading, as investors await news from the annual two-day Jackson Hole, Wyoming symposium of Federal Reserve leaders to be held virtually this year. The reports emanating from the monetary policy confab and Fed Chairman Jerome Powell’s prepared remarks tomorrow will be closely watched for clues about the central bank’s thinking on the possible tapering of its bond-buying program and interest-rate policy. The minor movement in the equity futures this morning would suggest such a start lies ahead.
The major equity averages will begin today’s session at or near record highs. In fact, the S&P 500 Index and NASDAQ Composite have finished at all-time highs 51 and 30 times, respectively, thus far in calendar 2021, and the former index has not seen a pullback of 5%-10% at any point this year. The age old adage “don’t fight the Fed” has been on full display, as any selloff in equities has quickly brought the bargain hunters into the market in a financial system that is flush with liquidity. The Fed’s ultra-accommodative monetary policies also have made for very few attractive alternative investments to stocks. The move higher this week has mostly been fueled by sentiment that the Fed will be guarded with regard to ripping the monetary band aid off, especially with rising coronavirus Delta variant cases around the globe. As noted, we may get more clarity on this situation tomorrow with Mr. Powell’s speech, which may potentially drive the market to close out a week that so far has been a productive one for those long equities.
The market has been led higher the last few sessions by the cyclical names, with interest in the financial, industrial, and energy sector picking up. These groups would likely perform the best in periods of higher inflation and with more signs of late showing that some of the higher prices may be more than transitory, the Fed could be approaching an inflection point where it will need to tighten the monetary reins. The thought on Wall Street is that the central bank will commence the tapering of its asset purchases before the end of this year, but the COVID-19 Delta variant makes this a fluid situation. The recent economic data, including an increase in new and existing home sales and solid durable goods orders (excluding the transportation component) data, adds to the tapering narrative. And at 8:30 A.M. (EDT), we got some more good news on the economy. A report from the Commerce Department showed that GDP increased by an annualized rate of 6.6% in the second quarter (it was the first revision to the June-period estimate), while the Department of Labor said that initial weekly jobless claims hovered around an pandemic-era low (at 353,000) in the latest week.
Meantime, the strong earnings news from the retailing sector continues to give a boost to the consumer discretionary stocks. The latest good earnings news yesterday came from Best Buy (BBY) and Dick’s Sporting Goods (DKS). The latter reported blowout results and said that the good times are likely to continue through the end of the year and the holiday shopping season. This morning, shares of Williams-Sonoma (WSM) are up sharply in pre-market action after the retailer posted strong quarterly results. Likewise, Dow-30 component salesforce.com (CRM) also beat expectations in the July quarter and its stock is pointing to a higher opening. The strong retailing results speak to the wellbeing of the U.S. consumer right now, and with the labor market improving, the gains are likely to continue for the mass merchandisers and the apparel chains. There are some stocks in the group that offer value, with their price-to-earnings ratios looking more attractive than those of the technology stocks, many of which sport elevated P/E multiples.
Speaking of the retailers, one issue that should be monitored is the spreading of the coronavirus in international markets, especially those that produce the materials and finished products for the major retailers. Many importers of manufactured goods from Vietnam and other nations in the Asia Pacific region may face supply-chain disruptions in the coming months that could potentially pressure their operating margins. Thus, those with an appetite for consumer discretionary stocks should focus on the companies that have the ability to weather any such storms and pass the likely rising production costs through to the consumer in the form of higher prices. This may work in the favor of the mass merchandisers, like Walmart (WMT) and The Home Depot (HD), among others.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
