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Before The Bell - The last five-day stretch of trading on Wall Street followed a similar script to what we saw during much of the month of July. That being a mixed performance for equities. Investors were forced to digest a number of big headlines (some encouraging, some disquieting) and that likely played a big role in the uneven performance for the U.S. equity market over the course of the week. For the five-day span, the Dow Jones Industrial Average fell 0.2%, while the NASDAQ and broader S&P Index climbed 3.7% and 1.7%, respectively. A strong conclusion to the week, particularly in the final hours of Friday’s session when the Dow 30 reversed course, changed the weekly narrative, to one than was more positive than one would expect given some disconcerting news on the U.S. economy and a continued rise in nationwide coronavirus cases. 

On Friday, what was looking like another mixed performance for the major averages, actually turned out to be a good day for the bulls by the closing bell. As noted, the Dow 30, which was trading lower for much of the session on some dour earnings news from several components, including Exxon Mobil (XOM), Chevron (CVX), and Caterpillar (CAT), reversed course late in the day, pulled out of the red by strong showings from the stocks of Apple (AAPL) and Merck (MRK). The big winners once again during the final trading session of July were the technology names, with the investment community able to look past the heavy scrutiny the heads of the industry’s biggest companies faced, when they testified before Congress earlier in the week on many issues, including antitrust concerns. Strong June-quarter results from the likes of Amazon.com (AMZN) and Facebook (FB) on Thursday afternoon, along with the aforementioned Apple, helped sustain the strong support the technology stocks have received during 2020. The tech-heavy NASDAQ is set to begin the new week right on the doorstep of the 11,000 mark. On the reverse side, it was another difficult day for the financial and energy companies. Earlier last week, both economically sensitive sectors were hurt by some uninspiring news from the business beat. The banking stocks also weakened after the Federal Reserve said it will keep interest rates near zero, which hurts the earning power of the lenders, while the oil patch was hurt by the aforementioned disappointing quarterly results from industry leaders Exxon Mobil and Chevron.

Even with last week’s gains, which came on the strength of technology, investors are showing some concerns that the U.S. equity market may have come too far too fast, especially with the COVID-19 pandemic still engulfing many of the nation’s biggest states and cities. In fact, demand for safe-haven instruments like bonds and gold, has been on the rise in recent weeks. The yields on Treasury notes, which move inversely to prices, fell sharply last week, especially after the Federal Reserve said it plans to keep rates near-zero to support the struggling U.S. economy. This morning, gold is trading just shy of the $2,000-an-ounce mark, given its defensive nature, but it also is seen as a good hedge against inflation down the road, especially when the bills from some of these aggressive stimulus packages come due. 

After digesting all of the headlines last week, including the coronavirus reports, the Federal Reserve’s monetary policy announcement, the current impasse on Capitol Hill on another round of COVID-19 stimulus for hurting Americans and small businesses, and the plethora of earnings reports from Corporate America, the one big issue that stuck out for us—and may play a big role in which way the market heads during the dog days of summer—was the disappointing news on the U.S. economy. While the massive second-quarter GDP decrease of more than 30% was expected, we were disappointed to see consumer confidence fall and initial jobless claims spike for the second-straight week. This may prove a headwind for investors over the next several weeks, as earnings season concludes and Wall Street still faces a wall of worry that includes a recent spike in nationwide coronavirus cases. The continued COVID-19 worries may make for a more prolonged recovery for the economy than many pundits initially expected, which would not be a great backdrop for U.S. companies, especially those that rely on the U.S. consumer, like retail, travel, and leisure.

Looking at the week ahead, many of the same issues remain in play, but our sense is that the debate on another coronavirus relief package in Congress will be the main focus of both Wall Street and Main Street. The failure to come to a compromise may roil the U.S. equity market. Meantime, earnings season will begin to slow down, with most of the Dow 30 companies now having reported results. On the business beat, we will get a number of important reports, including the latest data on manufacturing and nonmanufacturing activity from the Institute for Supply Management. The reading on manufacturing activity, which will be released at 10:00 A.M. (EDT) this morning, will give investors even more clarity about how well the U.S. economy is recovering. On point…  

Before the market’s open, the equity futures point to a higher start for the U.S. stock market. Driving equities here and around the globe upward were some encouraging readings on manufacturing activity from China and the euro zone. Both reports showed growth last month, with China’s PMI hitting a nine-year high. The main indexes in Asia finished higher overnight, while the major European bourses, most notably Germany’ DAX, are comfortably in positive territory as trading moves into the second half of the session on the Continent. Whether these good tidings continue stateside this morning may depend on what the U.S. manufacturing data shows a half-hour into today’s trading session. 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.