Before The Bell - It has been a rollercoaster ride this fall for equity investors, which is not unusual as the months of September and October have historically seen a spike in stock market volatility. Since the early stage of September the major equity indexes have produced a number of even performances, and last week was no different with another significant selloff to start the five-day stretch followed by a just as notable rally. For the five-day stretch, the Dow Jones Industrial Average and the S&P 500 were up 1.2% and 0.8%, respectively, while the NASDAQ Composite was flat and the small-cap Russell 2000 was down 0.4%. This morning, the futures are indicating some modest selling after last week’s slightly positive showing for stocks.

On Friday, it was a rather lackluster performance for the aforementioned averages, as a positive reaction to news that Congress had voted to extend the debt-ceiling deadline to December was offset by a much weaker-than-expected report on September jobs creation from the Labor Department. Specifically, nonfarm payrolls increased by 194,000 positions last month, while the consensus expectation was calling for the creation of more than a half-million jobs. Perhaps, the report, which also showed a drop in the unemployment rate to 4.8%, a decline in the labor force participation rate, and a spike in the average hourly wage, had some investors thinking that it may make the Federal Reserve push back its bond-buying tapering and that is why the market held up fairly well during the week’s final session. The Dow 30, S&P 500 Index, the tech-heavy NASDAQ Composite, and the Russell 2000 finished only nine, eight, 74, and 17 points lower, respectively, even with the disappointing jobs data.

Sometimes lost in some of the swift and at times pronounced shifts in daily and intra-day trading has been the sector rotation on display in recent weeks. The driving force behind the rotation has been Treasury market yields, specifically the benchmark 10-year Treasury bond. When the yield moves higher, often on inflation concerns, the cyclical stocks are in demand. The yield topped the 1.60% market last week and the financial, energy, and materials sectors moved higher. On Friday, the Dow Transports did very well, fueled by a strong performance from the railroad stocks. The thinking on Wall Street is that the buildup of containers at ports that need to be shipped around the country will allow the railroad companies to raise rates, especially as the holiday shopping season approaches. Conversely, the rising yields have hurt the high-growth technology and small-cap stocks, which were a big reason why the NASDAQ and Russell 2000 underperformed the Dow 30 and S&P 500 Index on Friday. The stocks of the semiconductor producers have been weak in recent trading. Our sense is that with yields likely on the rise in the coming months, this trading pattern may be revisited quite often over the new few months. Note that the U.S. bond market is closed for Columbus Day today.

Looking to the week ahead, the big news will be the commencement of third-quarter earnings season, which kicks off with the latest quarterly results from banking giant JPMorgan Chase (JPM) on Wednesday morning before the opening bell. That report headlines a busy few days of earnings news from the big banks. These reports may also provide more clues about how the U.S. economy may fare over the remainder of this year and in 2022; banking giant Goldman Sachs (GS) came out with lowered GDP forecasts for both 2021 and 2022 this morning. The banking stocks, as noted above, have fared well in recent weeks, as an expected uptick in lending rates would likely help the earning power of the financial institutions. Our sense is that Wall Street may need a solid performance from Corporate America over the next month to offset a growing “wall of worry,” which includes the COVID-19 Delta variant, the contentious atmosphere on Capitol Hill, debt and growth concerns for China’s economy, a possibly more-hawkish Federal Reserve, and last, but certainly not least, inflation worries and continued supply chain disruptions. 

The investment community will also be watching the business beat very closely, as a number important reports are due this week, including the latest readings on consumer and producer (wholesale) prices. Given the aforementioned inflation concerns, these reports are expected to be closely monitored by the Federal Reserve. Speaking of the central bank, the minutes from its latest FOMC meeting will be released on Wednesday at 2:00 P.M. (EDT), which may provide some insight into the Fed’s thinking on monetary policy. Also on the calendar this week is the latest report on retail sales, which comes before that start of trading on Friday morning. The pricing and sales data may also bring some of the consumer discretionary stock into focus later this week.

On a side note, investors should be aware that Merck & Co. (MRK) said this morning that it has applied for U.S. emergency use authorization for molnupiravir, its tablet used to treat mild-to-moderate patients of COVID-19. If approved, molnupiravir would become the first oral antiviral medication for the coronavirus disease. The pill, which would be taken at home, could halve the chances of death or being hospitalized for those most at risk of contracting severe COVID-19. Shares of Merck, which have been on fire since the news of the pill broke, are relatively unchanged in pre-market action. – William G. Ferguson

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