Before The Bell - This morning Wall Street turned its attention to two reports from the Labor Department that are likely to be closely scrutinized by the Federal Reserve for signs about the current state of the labor market and the inflation situation stateside. At 8:30 A.M. (EDT), we learned that initial weekly unemployment claims came in at 293,000 for the week ended October 9th, a pandemic-era low, while producer (wholesale) prices for the month of September rose 0.5% (+0.2%, excluding the food and energy component, versus the consensus expectation of +0.5%); the 12-month change in prices was +8.6%. The U.S. equity futures, which were sharply higher heading into those releases on strong quarterly results from the Corporate America (more below), are holding their gains.

The name of the game in recent weeks on Wall Street has been sector rotation, with investors eyeing the yield on the benchmark 10-year Treasury bond for signs about inflation. Yesterday, the 10-year yield backtracked and that prompted a selective rotation out of the cyclical stocks and into the high-growth names, primarily in the technology sector. The mega-cap technology names, which have been out of favor in recent sessions, were in demand during yesterday’s uneven sessions, which included a notable swing in the direction of the Dow Jones Industrial Average (the index of 30 bellwether companies finished the session relatively flat after being up more than 200 points in intra-day trading). Our sense is that the pullback in long-term bond yields provided some support for the technology stocks and the small-cap sector; both the NASDAQ Composite and Russell 2000 finished in positive territory yesterday. Rising prices and yields are not a welcomed sight for the smaller-sized companies.

Meantime, the third-quarter earnings season is off and running, with JPMorgan (JPM) and BlackRock (BLK) delivering strong quarterly results yesterday. The banking stocks will take center stage over the next two trading days, with tomorrow morning’s results from Dow-30 component Goldman Sachs (GS) expected to be the most scrutinized. This morning, we received reports from Morgan Stanley (MS), Bank of America (BAC) Citigroup (C), and Wells Fargo (WFC), with each of the banking giants beating expectations; shares of all four banks are up in pre-market action. Likewise, Dow-30 components UnitedHealth Group (UNH) and Walgreens Boots Alliance (WBA) posted strong quarterly results, with the latter company blowing by expectations. A continuation of positive results from Corporate America over the next fortnight may be needed with Wall Street facing a “wall of worry,” including the aforementioned worries about inflation, particularly in the energy market; a contentious atmosphere in Washington D.C., which has thus far delayed an infrastructure bill; the looming debt-ceiling deadline that was temporarily pushed back from October 18th to December; escalating tensions between the U.S. and China with regard to Taiwan; and slowing growth and debt concerns for China’s economy.

So what is an investor to do in an environment where an elevated amount of uncertainty exists right now? Our first recommendation is to keep a significant percentage of one’s portfolio in stocks. The age-old adage “don’t fight the Fed” still applies to this market, as a financial system flooded with liquidity has often seen investors buy on the dips, though the recent conviction behind the buying may not be as strong as we had seen entering this more volatile fall trading season. Given this backdrop—and the notable daily sector rotation on display—we think investors may be best served by looking at the quality names in each sector. The stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line have historically fared relatively better than the broader market during stretches of heightened volatility. With investors indeed staring at the proverbial “wall of worry,” we think a healthy concentration of high-quality equities of the blue-chip companies may provide the best downside protection should a market correction take place in the coming weeks and months.

With supply-chain disruptions a big operating problem for many companies, especially with the likely spike in retail demand coming from the fast-approaching holiday shopping season, we recommend that investors look at companies that are best equipped to overcome such issues. Two companies that come to mind are Dick’s Sporting Goods (DKS), which has low exposure to goods produced in COVID-19-ravaged Vietnam, and Costco Wholesale (COST), which can stockpile inventories in its extensive warehouses in anticipation of the coming spike in holiday demand. Amazon.com (AMZN) with its own logistics network also will have an advantage over much of its competition this holiday shopping season. Conversely, NIKE (NKE) has recently noted that a high exposure to goods produced in Vietnam has created some supply-chain disruptions and impacted recent results, which was evident in its August-period performance. Yesterday, shares of fellow Dow-30 component Apple (AAPL) were lower—on a good day for the technology stocks—after the tech behemoth said that semiconductor supply-chain woes will force the company to cut iPhone 13 production by 10 million units. On point …

The Biden Administration announced that ports in Los Angeles and Long Beach, California, which have experienced major bottlenecking issues, will now remain open 24/7 (which equates to roughly 60 more hours a week) to try to alleviate some of near-term supply-chain disruptions. While this move, which will include Walmart (WMT) increasing its workforce hours, is a step in the right direction, the shortage of shipping services (i.e., trucking and railroad capacity) still presents a huge logistics problem and a major obstacle to rectifying the domestic supply-chain woes. – William G Ferguson 

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