Before The Bell - The most recent four-day stretch of trading (the market was closed last Monday for the Labor Day holiday) saw a pickup in anxiety among traders, as a number of events, including the late-August, early-September spike in coronavirus Delta variant cases, had investors moving some of their funds out of riskier holdings and into more defensive-oriented stocks. The abbreviated-trading week saw the CBOE Volatility Index (or VIX) jump more than 25%, and investors seeking more quality holdings. That said, this morning the futures are indicating some bargain hunting at the opening bell, as investors continue the trend this year of buying on the dips.
The bearish mood on Wall Street last week was punctuated with the major equity averages selling off into Friday’s closing bell. Respective declines of 272, 133, and 35 points for the Dow Jones Industrial Average, the NASDAQ Composite, and the broader S&P 500 Index pushed the averages 2.2%, 1.6%, and 1.7% lower for the week, with the index of 30 bellwether companies posting its largest weekly loss since June. All 11 of the major equity groups finished the stretch in the red.
There is a lot of uncertainty for investors to deal with these days, and historically that has not been a good backdrop for equities. In addition to the aforementioned recent COVID-19 Delta variant worries and what impact it may have on the near-term performance of the U.S. economy, investors are concerned about inflation (Friday’s Producer Price Index showed a continued surge in wholesale prices), the looming debt ceiling debate in Congress, the possibility of higher taxes, particularly for Corporate America, under President Biden’s budget plan, and growing tensions between Washington D.C. and China. On the supply-chain front, automakers Toyota Motor (TM) and General Motors (GM) noted that they were cutting production due to a shortage in semiconductor chips. These supply-chain disruptions are pushing prices notably higher and raising the inflation concerns on Wall Street. With the major averages now in a period (the months of September and October) that has historically been a volatile one for stocks and valuations looking rather frothy, nervousness on Wall Street increased last week.
On Friday, the market had a negative reaction to a court ruling in the Apple (AAPL) versus Epic Games lawsuit. Although the court ruled in favor of the technology giant on nine out of 10 counts, shares of Apple were under pressure and it weighed on the performances of the Dow-30, the NASDAQ Composite, and the mutual funds and ETFs with high exposure to the tech titan. Wall Street viewed the part of the ruling saying that Apple can’t prevent developers from using external payment systems on its platform as a threat to the company’s app-store sales. This ruling, though could work to the advantage of developers, including Electronic Arts (EA), Netflix (NFLX), Spotify Technology (SPOT), Match Group (MTCH), and Roblox (RBLX), among others. This situation remains fluid, as an appeal from Epic Games seems quite likely, given commentary for its management following the decision.
Looking at the week ahead, the attention of Wall Street is likely to remain on the Delta variant and the U.S. economy. On the business beat, we will get a few important reports, including the latest data on consumer prices from the Labor Department at 8:30 A.M. (EDT) tomorrow. That report, along with last week’ PPI, is likely to be closely monitored by the Federal Reserve for inflationary pressures ahead of the commencement of its two-day FOMC meeting on September 21st. This week also will bring data on initial weekly jobless claims, industrial production, and retail sales. The latter data may provide more clues to what impact the Delta variant is having on the U.S. consumer. It may bring the retailing stocks into focus later this week. The consumer discretionary sector performed the best (on a relative basis) during last week’s bearish performance, helped in large part by a jump in the shares of lululemon (LULU) after the athletic apparel maker delivered blowout quarterly results.
Before the bell, the equity futures are presaging a rally for the U.S. stock market, with some bargain hunting on display after last week’s modest pullback. The market greeted positively reports that new domestic COVID-19 cases fell significantly over the past several days. Specifically, the seven-day average of new coronavirus cases dropped 27% from the recent September 2nd peak, raising hopes that the Delta variant wave has crested. If this trend continues over the next few weeks, it may remove a recent headwind for the reopening stocks, including those in the travel and leisure, hospitality, and recreation groups. Investors also should that Apple stock, following Friday’s noted pullback, is rallying in pre-market action ahead of the technology giant’s new product unveiling event, scheduled for tomorrow. – William G. Ferguson