Before The Bell
– The U.S. stock market picked up where it left off in August, which was with the major equity averages at or near record highs. Historically, September has been a volatile month for stocks, but it is worth noting that in years when the stock market is performing well, like has been the case this year with the S&P 500 Index not yet experiencing a decline of 5% to 10%, more gains are usually seen and the volatility is often pushed into October. On point, the first trading session was a mostly positive one for traders, with NASDAQ Composite and the Russell 2000 pushing forward on the strength of the high-growth sectors. The Dow Jones Industrial Average, though, is on a modest three-day losing streak.
The economic news has been the focus of Wall Street so far this week and that will likely be the case the next few days with reports due tomorrow on nonmanufacturing activity and employment and unemployment. Yesterday, a weaker-than-expected report on private-sector payrolls from Automatic Data Processing (ADP), which showed the creation of 374,000 positions versus the expectation for 600,000, brought concerns about slowing growth and worries about the continued impact of the coronavirus’ Delta variant. That offset a better-than-expected reading on manufacturing activity, though there also were some employment concerns raised from the ISM manufacturing data. Treasury market yields fell on the ADP report, with investors moving some of their funds into safe-haven instruments, like bonds and the more-defensive equity groups. The yield on the 10-year Treasury note, which moves inversely to its price, fell below 1.30% this morning.
Investors should be aware that the ADP report has not been a very reliable predictor of the nonfarm payroll data from the Labor Department. That said, the consensus expectation is that nonfarm payrolls increased by 720,000 in August, which would be a notable retreat from the more than 900,000 jobs added in both June and July. Wall Street will be looking at the report to see what impact the concerns about the increased Delta variant cases are having on hiring, especially in the recreation, travel and leisure, and food service sectors.
This morning, we received the latest initial weekly unemployment claims data, and that report showed a drop in claims to a pandemic-era low of 340,000. Elsewhere, the July U.S. trade gap figure narrowed from the biggest deficit in 29 years last month, while nonfarm productivity came in at a healthy 2.1%, but the figure fell a bit short of expectations. Our sense is that these releases will be supportive for the U.S. stock market today, but the overall impact on trading today will not be all that meaningful, as investors are unlikely to make any major moves ahead of the aforementioned release of August nonfarm payrolls data. Trading was light yesterday, with daily volume running well below its 20-day moving average, and we would not be surprised if that was the case once again today as investors await the labor market figures.
What we have seen on Wall Street in recent days, even during yesterday’s lethargic second-half performance, is a significant amount of sector rotation. The recent growth concerns, prompted by worries about the Delta variant, have pushed investors back into the high-growth groups, many of which were big winners during the height of the coronavirus pandemic. The technology names, including the FANG stocks and the mega-cap companies, have been on fire. In fact, shares of Facebook (FB) hit an all-time high yesterday and Amazon.com (AMZN) stock has recovered sharply from the setback following its most recent quarterly report. The technology stocks, along with the more-defensive groups, have provided the leadership this week. Conversely, the cyclical stocks are taking a breather, with the energy, financial, industrial, and materials names in the red during recent trading sessions. The mixed economic data of late, coupled with the infrastructure bill yet to reach President Biden’s desk for signing, has taken a bite out of the value-oriented cyclical stocks. Moving forward, the defensive sectors may garner more attention, especially if concerns about a decelerating economy intensify.
Before the bell, the equity futures, which took another step up after the release of economic data at 8:30 A.M. (EDT), are indicating a modestly higher opening for the U.S. stock market. Although the recent mixed economic data have raised some concerns about slowing growth, the overwhelming theme on Wall Street right now continues to be “don’t fight the Fed,” as the unprecedented liquidity in the market and lack of attractive alternative investments is supporting stocks and limiting the downside moves right now. And if anything, the recent economic data, including a weakening of consumer confidence, and the lack of a concrete commitment from Federal Reserve Chairman Jerome Powell on when the central bank will begin tapering its bond-buying activity may be pushing concerns among equity market participants about a monetary policy tightening farther out, much to the benefit of stocks. – William G. Ferguson