Before The Bell - The month of June started with the investment community looking to the economy for direction. After two rather directionless days to begin the month, the business beat provided an impetus to end last week. On Friday, the major averages produced notable gains after the release of the May employment and unemployment figures, with the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 Index jumping 179, 200, and 37 points, respectively. 

The May jobs figures from the Labor Department made for a “Goldilocks” report. Specifically, nonfarm payrolls increased by 559,000, which came in short of expectations, and the unemployment rate fell to 5.8%. The data signified that the economy is expanding, but may not be in danger of overheating. The yield on the 10-year Treasury note fell following the release, and investors viewed the report as one that would not force the Federal Reserve to move sooner than expected on the monetary tightening front. Our sense is that the central bank will begin tapering its bond-buying measures soon, but will not rip the band aid off the recovery by raising near-term interest rates. This sentiment drove equities higher to end the week, with investors’ appetite for risk picking up a bit.

The thought that the Fed will stand pat with interest rates gave a boost to the high-growth stocks, leading to outsized gains for the NASDAQ Composite. The index rose a healthy 1.5%, with leadership coming from the technology sector. That said …

We continue to recommend that investors take a look at the value stocks in the cyclical sectors. These issues are more likely to perform better during periods of inflation. Although the bond yields pulled back last week, we still think that inflation will become more of a factor during the second half of this year. Prices are rising in a number of sectors, fueled by unprecedented spending to combat the COVID-19 pandemic, labor shortages, and major supply chain disruptions. Crude oil prices topped the $70-a-barrel mark on Friday and the recent labor market releases have shown notable wage inflation. If the inflation pressures prove to be more than transitory, the talk of a monetary tightening later this year could again weigh on the high-growth areas. The oil and gas prices and the stocks of the energy companies have gotten a boost from expectations that demand will accelerate this summer, as more vaccinated Americans start to travel and take vacations.

Looking to the week at hand, Wall Street may again be searching for news to drive trading, as the economic calendar is very light. Perhaps, the ongoing negotiations between the White House and Senate Republicans on an infrastructure bill will get more attention. On the economic front, all eyes will turn to Thursday morning after a quiet three days to start the week. The penultimate trading day of this week will bring the latest initial weekly jobless claims and the May consumer pricing data. The CPI Index will be closely watched for signs about inflation.

Before the opening bell, the equity futures are indicating a mixed start for the U.S. stock market. Initially, none of the major averages are likely to be too far removed from the neutral line. As noted above, it will be a quiet few days on both the economic and earnings fronts, which may have Wall Street searching for news to drive trading. That may not come to the end of this week when we get more clarity on consumer prices. 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.