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Before The Bell – The U.S. stock market has been on a rollercoaster ride over the last four trading sessions. After a dour close to last week and a significant selloff on Monday, which saw the Dow Jones Industrial Average drop 726 points during the week’s first session, the major indexes rallied notably the last two days, with the index of 30 bellwether companies recouping all of Monday’s losses and then some. Investors continue to weigh concerns about the Delta variant strain of the coronavirus and what impact it may have on the near-term performance of the U.S. economy against a strong showing from Corporate America during the ongoing second-quarter earnings season. Of the S&P 500 companies to report results so far, the average year-to-year earnings advance is in the neighborhood of 75%. 

This morning the focus of Wall Street is again on corporate earnings, and so far before today’s open, the results have been good, with better-than-expected performances from AT&T (T), Dow Inc. (DOW), and American Airlines (AAL).  The strong results from Corporate America are providing support for equities. Our sense is that the latest quarterly results and commentary from semiconductor giant Intel (INTC) after today’s closing bell will be of great interest because it will provide some more insight on the ongoing chip processing shortage, which has played a major role in many of the recent domestic supply-chain disruptions and resultant higher prices. Of note, General Motors (GM) recently stated that it is temporarily suspending production of some of its bigger trucks due to the ongoing dearth of computer chips.

There also are few important statistics due this morning on the economic side.  At 8:30 A.M. EDT, data from the Labor Department showed that initial weekly unemployment claims jumped to 419,000 in the latest week, up from a revised 368,000 during the previous seven-day stretch. Existing home sales data will be released at 10:00 A.M. EDT. The Dow equity futures, which were positive heading into the claims report, reversed course and we now are looking at a mixed opening for Wall Street.   

The new trading day starts with the major equity indexes less than 2% from their respective record highs. It also should be noted that the small-cap stocks, which have been out of favor so far this month, led yesterday’s rally with the Russell 2000 climbing nearly 2%. This may be signaling a broadening of market participation, which could potentially take the entire stock market higher. The strong rebound in the high-growth small-cap names also may be an indicator that Monday’s fears about the Delta variant strain putting the continued economic re-openings in some risk could turn out to be an overreaction and that investors will continue to seek some riskier equities. That said …

We still think the best strategy is to give the stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line a close look. These issues, which include most of the blue-chip names and the industry leaders with strong balance sheets, have historically fared the best during periods of heightened market volatility. With stocks still looking priced for perfection, a near-term correction can’t be ruled out. Investors would be wise to note the recent volatility in the Treasury market. The performance of the bond market tends to precede the equity market, and the recent spike in volatility of Treasury yields (the rate on the benchmark 10-year Treasury note had fallen from nearly 1.75% last month to 1.13% on Monday, before recovering to near 1.30% this morning) has not been seen since February, 2020, the period right before the market fell on the coronavirus outbreak stateside.

The old-age saying “don’t fight the Fed” still has to be one that investors take to heart. The highly accommodative monetary and fiscal policies over the last 17 months to combat the impact of the coronavirus on the U.S. economy and financial markets have pumped unprecedented amounts of liquidity into the marketplace and have left investors with very few attractive alternative investments to stocks. (This morning the European Central Bank followed the same path taken last month by the Federal Reserve, keeping interest rates the same and making no changes to its asset-repurchase programs.)  We continue to recommend that subscribers maintain a healthy percentage of stocks in their portfolios. In recent months, Wall Street has rotated in and out of both the value and high-growth sectors, so the best strategy may be to keep a diversified and well-rounded portfolio with a preference for the stronger companies. Value Line’s stock screening capabilities can make this often daunting task quite simple.  – William G. Ferguson

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.