Before The Bell
The month of September, which draws to a close this week, started to live up to its reputation during the most recent five-day stretch of trading. A historically volatile 30-day period produced a few wild sessions last week. A huge selloff to start the week was sparked by a report that one of China’s largest property developers, Evergrande, faced a debt crunch at the end of the week and concerns emerged that it may produce a global contagion for the financial markets. But those fears eased a bit when signs pointed to Evergrande’s problems being a one-off event and one that would not spark an international debt crisis. That, along with another mostly dovish statement from the Federal Reserve following its latest FOMC meeting fueled a strong rally on Wall Street, in which the major averages retraced all of last Monday’s losses and then some by the close of trading on Friday. A mixed opening to the new trading week appears to be in cards, though the Dow futures are now trading well off their early morning high.
The final day of trading last week saw the U.S. stock market take a breather after a wild first four days of trading. All of the major averages finished none too far removed from the neutral line. The main theme on Wall Street was once again, “don’t fight the Fed,” as the central bank’s decision to make no immediate changes to monetary policy, and dovish remarks from Chairman Jerome Powell, put some renewed wind in the sails of the market bulls. Whether this trend continues this week may depend on the news from the business beat.
The news on the U.S. economy, along with looming concerns about the debt ceiling debate on Capitol Hill and the possibility that a government shutdown (the deadline is this Friday) may occur if a deal to raise the ceiling among lawmakers can’t be reached, are likely to be the main drivers of stocks this week. On the economic front, we will get a number of important reports, including data on consumer confidence, initial weekly jobless claims, the final revision to second-quarter GDP estimate, and manufacturing activity. And just minutes ago, we learned from the U.S. Census Bureau that new orders for manufactured durable goods in August increased a much better-than-expected 0.7%; durable goods orders excluding transportation were up 0.2%. It was a very good reading and, when combined with upward revisions in the July figure, a sign of some strength in the U.S. economy and an indicator that companies are investing in their businesses.
So what should investors do right now? Our recommendation is to keep a significant level of funds in stocks, as the “don’t fight the Fed” mantra is likely to persist until the central bank gives a reason to believe it won’t anymore. And if the Fed decides to begin its tapering in December, which would likely be in the form of a $15 billion decrease in its $120 billion monthly bond-buying program, with an eye toward ending the asset purchases by next June, the central bank will still pump another $600 billion of cash into a financial system that is already flush with liquidity. This, along continued with talks of a multiple trillion dollar spending plan on Capitol Hill, may spark additional inflation concerns, despite the Fed maintaining its current stance that the higher prices are transitory in nature.
The inflation-trade stocks are likely to be in demand when trading gets underway stateside. The yield on the 10-year Treasury note, which traded in a tight band around the 1.30% level for an extended stretch recently, has broken out of that range in recent days, and is now trading above the 1.50% mark, with a boost coming this morning following the durable goods orders figures. With this developing backdrop, we would give the consumer cyclical and the inflation-trade stocks a longer look, especially after they were out of favor this summer. The commodity-driven energy and materials stocks are pointing to a higher opening today, and the rising yields are fueling interest in the financial issues. Shares of most of the big banks, including JPMorgan Chase (JPM), are set to start the week in the green. Conversely, the futures are suggesting some selective movement of the technology stocks.
Before the bell, the equity futures are indicating a mixed opening for the U.S. stock market. The Dow futures are trading nominally higher, with interest in the consumer cyclical (i.e., energy and materials) stocks providing some support, while the NASDAQ futures are in the red, with the aforementioned rise in bond yields weighing on some of the higher-growth technology names. 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.
