Welcome to the halftime break. There will be no concert.
After a mixed result overseas early Wednesday, the markets are likewise rather quiet. We’re in wait-and-see mode ahead of Friday’s monthly payrolls data, so it’s not surprise if we don’t have much movement today. Also, as the globe grapples with the Delta form of Covid, there may be some hesitancy and caution. Concerns over this were reportedly one factor sending European stocks lower today.
It’s like the dog days of summer have arrived. We’re going for a leisurely swim in the pool, making small but steady progress. With these tentative advances, people may not be eager buyers, but there doesn’t appear to be much selling desire either. Volatility is a touch higher this morning, so we’ll see whether that continues into the jobs report.
According to the ADP jobs report released this morning, private payrolls increased by 692,000 in June, with construction payrolls also increasing. Because construction job growth was modest in May, this could speak favorably for Friday’s payrolls data. According to Briefing.com’s estimate, analysts expect job increases of 680,000 in Friday’s report.
With the first half of the year nearly over, the S&P 500 Index (SPX) is up around 14% year to date and on track to post gains for the fifth month and fifth quarter in a row, barring some type of tragedy. The Nasdaq 100 (NDX) is up about 13% for the year, the Dow Jones Industrial Average ($DJI) is up 12%, and the Russell 2000 Index (RUT) of small-caps is out in front with nearly 17% gains for 2021.
What will the situation be like at the end of the second half? When the whistle blows in six months, we’ll know.
Is It “Permanent” Or “Transitory?” Inquiring Minds Are Curious
We’re still locked in a market that doesn’t want to move forward quickly. Part of this could be due to the current tug of war between value and growth. What this boils down to is a battle over whether inflation is transitory—as the Fed defines it—or permanent.
Because current inflation readings compare to a year ago, when Covid had the economy on lockdown, it may take a few months to figure out. Comparisons may not normalize until the fall or winter, when we can see where things actually stand.
According to The Wall Street Journal, inflation is still a key issue for investors. According to a new Bank of America Global Research study, investment managers see inflation and a bond market “taper tantrum”—a potential surge in Treasury yields when the Fed announces it would tighten monetary policy—as two major threats.
As the situation unfolds, it appears like there are few triggers to drive things in one direction or the other. Even this week’s positive news, which has included a solid consumer confidence reading, banks hiking dividends, and United (NASDAQ: UAL) announcing a large purchase of Boeing (NYSE: BA) jets, hasn’t had much of an influence on market values. Despite the dividend news, the financial sector lost some ground on Tuesday. Morgan Stanley (NYSE: MS) and Goldman Sachs were the exceptions (NYSE: GS).
“You can’t battle the Fed,” says the old adage for investors. When it comes to low-interest rates hurting on earnings, the banking sector can’t battle the Fed. The 10-year yield is still hovering around 1.5 percent, which could make it tough for bank stocks to continue to rise. Remember that the sector makes money in part by paying lower rates on short-term deposits than it does on long-term loans, so net-interest income is important. The yield curve has flattened, with the spread between two-year and 10-year Treasury yields currently slightly around 120 basis points, according to Bloomberg.
After the break, bank earnings season will begin, and we’ll go through the industry environment in further detail. Rates are likely to remain range-bound until after the break.
Ahead of the Payrolls Report, You’re Stuck In The Mud
In fact, barring a dramatic surprise in Friday’s June payrolls report, it appears unlikely that major market indices would break very far out of their ranges before the holiday. When people return and we go into more of a summer trading mood after July 4, we might see broader ranges in the market, but the fundamentals arguably aren’t pointing to a significant break one way or the other right now.
On the TD Ameritrade Network,* our media affiliate, one analyst mentioned yesterday that there has been some profit-taking in “cyclical” sectors like Energy, Financials, and Industrials recently, but he hasn’t seen a corresponding increase in money allocated to either “defensive” or “growth” sectors. That’s only one analysis, so don’t read too much into it, but if it’s happening on a large scale, it could indicate that people are holding off on making new investments.
There has also been a minor shift away from “reopening” stocks like airlines and hotels in recent months, but this could be “transitory,” as the Fed might phrase it. Concerns regarding the Delta form of Covid may be contributing to this tendency.
This week’s events are leading up to the release of the June payrolls data on Friday. Wages, as well as the makeup of any new positions, are another important aspect of the study (see more below). Although the service industry has recently led the way in terms of employment creation, don’t be shocked if we see an increase in education jobs in the coming months as back-to-school time approaches. Also, as previously stated, keep a watch on the construction.
As small-caps retreat, technology continues to gain.
The one sector of the stock market that has been resilient so far this week is technology, which gained 0.7 percent on Tuesday. Another good day for the semiconductor industry contributed to this, due to some bullish analyst notes.
Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT), both of which have market capitalization over $2 trillion, have recently benefited from the wind. The spike in Apple’s stock, in particular, might spread to other sections of the Tech sector, including chips. Given how important chips are in many of AAPL’s products, if the company has a successful quarter, chips may have a good quarter as well.
On the issue of semiconductor stocks, Micron (NASDAQ: MU) is anticipated to release earnings this afternoon, giving us a sneak peek into the sector. Analysts that follow the company expect a great performance, with chip prices and shipment growth expected to be the main topics of discussion. Last time around, the corporation outperformed analysts’ expectations. Constellation Brands (NYSE: STZ), a maker of beer, wine, and spirits, climbed marginally in pre-market trade this morning after topping Street projections and improving guidance.
After the Russell 2000 (RUT) small-cap index finished its rebalancing last Friday, small-cap stocks have had a hard week. Over the course of a month, the index is rebalanced to ensure that it is truly representative of the markets it represents. The rebalancing of the RUT resulted in a higher percentage of Health Care and a lower presence of Consumer Discretionary.
With a rebalance underway, the current RUT weakening is a little more difficult to interpret. At moments like this, you can see a fast spike higher or a selloff, but it might take weeks for the market to adapt as individuals try to figure out how the reconstitution has influenced the index. So perhaps it’s a little early to be concerned about the RUT’s recent weakness.
TRYING TO TELL US SOMETHING WITH YOUR CHART OF THE DAY? Looking at gold futures (/GC—candlestick) and the dollar index ($DXY—purple line) over the previous month, it appears that they are still anticipating monetary tightening. The dollar index hit two-month highs on Tuesday, while gold plummeted to its lowest levels since mid-April. ICE and CME Group are the data sources. The thinkorswim(R) platform provided the data for this graph. Only for the sake of illustration. Past performance isn’t a guarantee of future success.
Green And Gold: While it’s still unclear where inflation will end up and how the Fed will behave, the US dollar and gold market are acting as if they know something we don’t. Since the Fed meeting earlier this month, the dollar has stayed strong, with the dollar index surging above 92 on Tuesday and remaining at two-month highs. On Tuesday, gold swung in the opposite direction, falling another 1% to roughly $1,761 an ounce. That’s the lowest it’s been since mid-April, when inflation fears were at their worst.
These are the types of dollar and gold moves you’d expect to see in a more hawkish Fed environment. Stocks, on the other hand, are around all-time highs, while the bond market continues to sway. In other words, the verdict is yet out.
Sir, may I have some more, please? When Friday’s monthly jobs data is released, significant issues will include whether earnings increased and by how much. Higher wages might sometimes act as a canary in the coal mine for rising inflation. When job postings are at an all-time high and many businesses can’t find workers, they may have to raise wages to attract new employees. Furthermore, if the prices of basic items such as fuel and food continue to rise, as they have, many employees are likely to ask for a raise in order to buy what’s on the shelves. The worst-case scenario is a “wage-price spiral,” in which workers want greater wages, which prompts employers to raise prices to help pay the wages, prompting more people to demand raises and prices to rise even higher. The Fed would most likely like to prevent this.
Over the 12 months ending in May, average hourly salaries increased by 2%, which may not seem like much. However, it was a significant increase from April’s 0.4 percent yearly increase. May’s average hourly wages increased by 0.7 percent month over month, which is a significant increase by historical standards. According to Briefing.com, analysts estimate a 0.4 percent month-over-month increase in June. That’s not the kind of number that’ll stoke inflation fears in the markets, but keep a watch out for any unexpected developments.
Jumping from Claim to Claim: Despite the fact that the largest jobs report thi/n
