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Before The Bell - The attention of Wall Street will again be on the economic recovery today, as we get a number of important reports on the economy, leading up to monthly Labor Department figures expected tomorrow.  Earlier this morning, Automatic Data Processing (ADP) reported that private-sector payrolls increased by 978,000 last month (the expectation called for 680,000 new positions), and at 8:30 A.M. (EDT), government figures showed that initial weekly unemployment claims fell to a pandemic era low of 385,000. The major averages, which have been rather directionless over the first two trading days of June, were down before the open. If the job growth in May coming out tomorrow is quite strong, inflation concerns could reappear, and the size of the expected infrastructure spending bill might wane.

Diving deeper into forces driving the markets, the equity futures are presaging a lower opening when trading commences stateside. The investment community did not like to hear that the Federal Reserve may soon begin tapering some of its bond-buying measures. The U.S. dollar weakened on this news. Likewise, investors both here and abroad are reacting negatively to reports that the United Kingdom is considering delaying the final stage of reopening by two weeks if hospitalizations and deaths from COVID-19 increase. Geopolitical tensions are heightened after Russia's finance minister announced that with the country facing additional economic sanctions from the United States, it will remove all of the U.S. dollar assets from its National Wealth Fund and instead shift to euros, Chinese yuan and gold.

Today’s jobs figures are another strong indication the U.S. economy is recovering sharply from last year’s coronavirus-driven recession. That sentiment was also seen in the Federal Reserve’s latest Beige Book summation of economic conditions (released at 2:00 P.M. (EDT) yesterday). The central bank said that U.S. output grew at a faster pace in April and May than earlier in the year, with the overall economy expanding at a “moderate pace.” The primary catalyst was a spike in consumer spending, helped by increased coronavirus vaccination rates and stimulus measures put in place earlier this year. We will get further clues to how the consumer is feeling a half-hour into today’s trading session when the Institute for Supply Management releases its nonmanufacturing activity figures. 

With the investment community’s focus to remain on the business beat, and the data likely to prove supportive in the coming months as the U.S. economy nears a full reopening, we would continue to recommend that subscribers look at the value-oriented cyclical names. The energy sector has performed well in recent days, as oil and gas prices rose on the expectation of high demand for crude this summer with more people traveling. The infrastructure stocks remain interesting plays as well. We continue to anticipate a compromise bill of significant size will pass, as the Biden Administration and Senate Republicans continue to discuss the size and details of the Administration proposal. 

The value stocks also are likely to perform the best if inflation becomes a bigger concern later this year as the economy heats up. Although the Fed’s stance on inflation is that it is transitory, supply chain challenges persist and pressures build as both input and selling prices move higher. Concerns about inflation, higher bond yields, and a less accommodative central bank would not be a good backdrop for the higher-growth stocks in the NASDAQ Composite and the small-cap Russell 2000. We saw glimpses of such over the last few months. Ironically, continued strong data on the job creation may bring more talks of the Federal Reserve tightening the monetary reins sooner than expected. That also may not be good news for the higher-growth sectors, like technology. 

Finally, the talk on Wall Street during two directionless sessions this week was the meme stocks. A meme stock is any publicly traded company that is benefiting from a band of ordinary investors who are using social media to drive interest in the company's shares. This again drove up the stocks of AMC Entertainment (AMC), GameStop (GME), BlackBerry (BB), Bed Bath & Beyond (BBBY) and Koss Corp. (KOSS). We continue to believe that these volatile issues carry a very high amount of risk and are best left for the most nimble investors. 

In general, we think the most prudent strategy for our subscribers is to keep a significant portion of their funds in the stock market and continue looking at the stocks ranked 1 (Highest) and 2 (Above Average) for Safety by Value Line. This group, which contains a host of the blue-chip names, has historically done better than the broader market when a correction occurs. With the major averages trading near all-time highs, many stocks looking priced for perfection, and Wall Street facing a possible “Wall of Worry” in inflation later this year, a correction to take the froth out of the market can’t be ruled out. – William G. Ferguson

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