Before The Bell
The name of the game being played on Wall Street the last several weeks has been sector rotation. Indeed, investors have seesawed back and forth between the cyclical and high-growth groups, dictated, for the most part, by what the economic and earnings data have indicated, as well as by the latest musings from the Federal Reserve and its leaders. Before the opening bell, the equity futures are presaging a mixed opening for the U.S. stock market, with some sector rotation again likely to be at play.
On point, Friday’s strong report on July employment and unemployment data, which showed that nonfarm payrolls increased by a healthy 943,000 last month and the jobless rate fell to 5.4%, was a good reading on the economy. This pushed investors into the cyclical sectors, including the financial and industrial stocks, which were having a difficult stretch heading into the final trading day of last week. The passage of an infrastructure bill on Capitol Hill this week also would likely give a boost to some of the cyclical groups. Conversely, the strong employment data drove Treasury yields, which were under pressure earlier in the week (the yield on the 10-year Treasury note fell to 1.12%), higher and brought sentiment that the Federal Reserve may opt to tighten the monetary reins before its initial timeline. This resulted in some rotation out of the higher-growth technology stocks, with the NASDAQ Composite finishing modestly to the downside on Friday.
Meantime, the second-quarter earnings season, which has been mostly supportive for equities, will start to wind down in the coming week. The stocks that have been under selling pressure have mostly been the newline technology names that skyrocketed during the pandemic with most Americans performing most of their everyday tasks online. Of note, Netflix (NFLX) and Esty (ETSY) shares sold off after each reported some slowing in their performance metrics, with most investors thinking the reopening of the U.S. economy will result in people spending less time online. With that said, investors should be paying close attention this week to the latest quarterly results from Walt Disney (DIS), as it will provide more color on the streaming industry and the on the state of the U.S. reopening. What Disney’s management says about the state of their theme parks and what the recent emergence of the coronavirus Delta variant may have on their business going forward may have an impact on the broader market. The Disney earnings are due after the closing bell on Thursday afternoon.
The news from the business beat also will be closely monitored, with Wall Street focused on the latest pricing data. The inflation debate—particularly whether it is a long-term issue or transitory in nature—has been a hot-button topic for Wall Street, and it has produced some notable daily and intra-day market moves over the last few months. The consumer and producer (wholesale) pricing data are due before the opening bell on Wednesday and Thursday, respectively. If the price increases are bigger than expected, it may push bond yields higher and give a boost to the cyclical and inflation trade (i.e., financial, materials, and industrial) stocks. Conversely, a more-benign reading would likely be to the benefit of the high-growth technology and small-cap stocks. Meanwhile, Friday’s University of Michigan consumer sentiment index may provide some clues on how the consumer is faring ahead of the release of a number of important quarterly reports from the U.S. retailers over the next fortnight.
This morning investors should note that we are seeing some continued volatility in the commodities markets. Last week oil was under pressure and crude prices are heading lower again. The investment community also is focused on the gold market, where liquidity concerns overnight resulted in the price of the precious metal falling more than $100 an ounce. Spot bullion fell more than 4%, dropping $60 in minutes, as the selloff following Friday’s strong employment data accelerated at the start of trading. It then took another step lower after breaching a technical support level and triggering stop losses, on a day when liquidity was low due to holidays in Japan and Singapore. The commodity has since retraced a good portion of the decline, but is still down nearly 1% this morning and may continue to experience some volatility as sentiment that the Federal Reserve may move up its tapering timeline grows.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
